Tuesday, September 09, 2008

Fannie and Freddie need to be disassembled

Well, the stock market went up dramatically the day after the government announced the bailout of Fannie Mae and Freddie Mac, then plunged almost the same amount the next day. Gerald O'Driscoll, former chief economist at the Dallas Federal Reserve, whom I talked to for an article I'm writing for Sunday, told me it was the typical pattern after a bailout -- elation for a day, then sobriety as the implications sink in. He doesn't know why investors are so naive as to repeat the pattern again and again.

Anyway, here's the Register's take on it (at least initially, we'll have more to say on Sunday), recommending that the two be disassembled and sold to the private sector in small chunks. Having the GSEs be so predominant in the secondary mortgage market was never intended, and the result is that financial markets all over the world are at risk because the two have so much debt going sour and lots of institutions holding shares. The notion that only a government agency can handle this chore is a myth. After the recent accounting scandal, Fannie and Freddie's share of the market plunged to 14 percent in 2005 (it's about 42 now) and the mortgage market didn't even notice. Plenty of private companies are performing the same insurance and securitization functions, but more responsibly.

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