Wednesday, June 29, 2011

Time to do away with Fannie and Freddie?

We think maybe it's time. Here's B-Daddy on the matter:

Here is what I do know. Fannie and Freddie are political creatures of the federal government. Their lending standards are therefore set by politics, not market conditions. Surely there will be pressure for them to loosen their standards by those politicians for whom this will be expedient. This is why Fannie and Freddie need to be broken up into smaller entities and divorced from their status as Government Sponsored Entities. (I can't find that term in the constitution.) The new companies, by competing on how well they assess the riskiness of loans, will find the correct equilibrium for the housing market. Further, these companies could seek out innovative ways to hold banks and other loan originators liable for bad loans that were due to lack of due diligence. This seems like a great way to inject true free market principles to re-vitalize the housing market.

And what did we hear with respect to bailing out General Motors, the Wall St. financial institutions and Fannie and Freddie among others? Too big to fail, right? These smaller entities that will take the place of Fannie and Freddie take the starch out of that argument that was central to the justification behind Bailout Nation. Let's put the housing market back in the hands of the market instead of that of politicians.

Yep, time for them to go.

1 comment:

B-Daddy said...

Thanks for the link and pointing out the key issue of killing off the too big too fail fallacy.