A great op-ed by Harvard economic professor Edward L. Glaeser in the Boston Globe. Glaesar argues that we need to get rid of Fannie Mae and Freddie Mac to save the housing market:
Let’s start with the basic question: Why should Fannie and Freddie exist at all? Supporters made two standard arguments. The simpler one is that Freddie and Fannie increase homeownership by making borrowing cheaper. It is surely true that if the federal government guarantees mortgages against default without charging enough for that guarantee — which is what happened — then this underpriced guarantee is yet another implicit subsidy for home borrowing and homeownership.
But a policy isn’t wise just because it promotes homeownership. There are more transparent ways of doing so, such as a direct annual homeownership tax credit. Besides, how much promotion does homeownership need? The home mortgage-interest deduction already encourages people to overborrow to bet on the housing market.
Glaesar goes on to discuss the options for winding them down slowly. I’m not sure that Glaesar’s suggestion to “reconfigure Freddie and Fannie as a purely public agency — one that is slow and risk-averse” is a good idea. I think it’s nearly impossible to create any federal agency of this sort that won’t be politically manipulated. Nonetheless, his op-ed is worth reading and considering.