President Bill Clinton’s Secretary of the Treasury Lawrence Summers and Heritage don’t always agree. But few experts seem to be satisfied that the new regulator for Freddie Mac and Fannie Mae will be enough to address the systemic risk Fannie and Freddie pose to our financial system. Summers wrote in the Washington Post yesterday:
[T]he government should use its new receivership power to protect taxpayers and the financial system. In the process, payments to stockholders, holders of preferred stock and probably subordinated debtholders would be wiped out, conserving cash for the benefit of taxpayers. The GSEs’ borrowing costs would fall considerably, helping prospective homeowners. … Once the crisis has passed, the federal government would divide their functions into government and private components, the latter of which would be sold off in multiple pieces. The proceeds could be used to fund the low-income housing support activity that was previously mandated to the GSEs.
Heritage scholar JD Foster writes in the Orange County Register:
As Congress readies a bloated housing bill, Americans should demand Congress ensure this kind of financial threat never looms again. Strengthening the federal regulator for FM2 is fine, but we really need to break these financial goliaths into many, much smaller and truly private companies. Unfortunately, there isn’t time now to scheme the breakup of FM2 properly. Instead, Congress should separately task the General Accountability Office and the Federal Reserve with producing a study with its recommendations on how FM2 might be restructured into a variety of private, separate companies.
Once cut down to size and properly regulated, these new companies would pose little risk in and of themselves, would never become too big to fail, and so would lose their implicit guarantee of a future bailout. It’s not enough to call in the ambulance. We need to catch the mugger who perpetrated this crime – and make sure he never haunts the neighborhood again.