Senate punts on Fannie and Freddie
I was sympathetic to John McCain's plan to eliminate Fannie Mae and Freddie Mac, but Annie Lowrey made a pretty compelling case that it was a terrible idea. But it was a terrible idea for a weird reason: It got rid of a bad idea too fast.
Fannie Mae and Freddie Mac are what happens when ideological compromise goes horribly wrong. On the one hand, they're supposed to make housing more affordable. On the other hand, they're private companies, because you wouldn't want some sclerotic government agency at the center of this. The result? Profit-maximizing corporations that enjoy the government's backing. That means the debt markets treat them as almost riskless, as the government will clean up their messes, and so Fannie and Freddie can borrow money cheap. But then they take a bunch of risks in order to juice shareholder returns. It's everything you don't like about the private sector combined with everything you don't like about the public sector.
The problem, however, is that the housing market depends on them. In the first three months of the year, Fannie and Freddie backed up 97 out of 100 mortgages. You remove them -- or even suggest to the market that you may remove them in the future -- and the housing sector will nosedive. Faced with this, the Senate punted: They rejected John McCain's plan but approved an amendment from Chris Dodd directing the Treasury Department to study the issue and figure something out.
But what are they expecting Treasury to do, exactly? It's not that we can't reform Fannie and Freddie. It's that the Senate can't vote for any serious reform of Fannie and Freddie, any more than it could vote for an end to the mortgage interest tax deduction.
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