Why aren't Fannie and Freddie in FinReg?
One of the right's talking points on financial reform is that it needs to include major reforms of Fannie Mae and Freddie Mac. That seemed fair enough to me, at least until I started working on a Fannie Mae and Freddie Mac explainer and realized it belies the reality of the issue. And Republicans, I think, know that.
If you read the Republican FinReg proposal, it does three things on Fannie and Freddie: It appoints a new special inspector general inside the mortgage giants to make regular reports to Congress. It undoes the emergency measures put into place during the financial crisis. And it directs the president "to submit a plan to reform [Fannie and Freddie] to Congress no later than six months after the enactment of the Act."
In other words: Ready, set, PUNT!
What we do with Fannie and Freddie has more to do with our priorities for the housing market than our priorities for the financial system. The entities exist to make mortgages cheaper (I'll get into the how of that tomorrow). Eliminate them, or substantially change them, and mortgages will get more expensive. You're talking about taking a massive -- albeit somewhat opaque -- subsidy to the middle class and eliminating it. That is to say, the politics of reforming Fannie and Freddie are more like the politics of reforming the mortgage interest deduction than reforming financial regulation.
That's why the administration prefers to reform Fannie Mae and Freddie Mac in the context of a housing bill: The immediate effect of reform will be felt in the housing market rather than the financial sector, and you'll likely need a basket of different housing reforms to ensure some semblance of a smooth transaction. Wrapping a housing overhaul in financial-regulation reform is like trying to run an ultra-marathon while climbing a mountain.
As it is, I'm a steadfast opponent of the government's endless interventions into the housing sector, and I'd like to see some fairly radical reforms here. But I'd advise people against listening to anyone who's calling for those reforms rather than specifying what they should be. It borders on the absurd that the Republican proposal for Fannie and Freddie is for Obama to submit a proposal for Fannie and Freddie at some point in the future, but it's just one more absurdity generated by the sanctity of our program of housing subsidies. Until we're ready to talk seriously about them, we're not ready to talk seriously about Fannie and Freddie.
Photo credit: AP Photo/Pablo Martinez Monsivais.
May 4, 2010; 5:22 PM ET
Categories: Financial Regulation , Housing Crisis
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