Does Another Huge Taxpayer Bailout Now Sound Appealing?

Includes: FMCC, FNMA
by: BlindReason

The GOP is giving the president a tough time on financial reform because it hasn't addressed Fannie Mae (FNM) / Freddie Mac (FRE) reform head on in the current financial reform bill. These are the quasi public / private institutions that keep cash flowing into real estate assets and ostensibly serve to encourage home ownership by Americans. No question these institutions need massive reform, but doing so right now could trigger another economic downturn even worse than the 2008 downturn.

While one can defend the larger social benefit of home ownership, as with many things we just took this policy well beyond any reasonable excess and are in a terrible situation now. There is no question these institutions require a draconian and massive reform, but timing is an issue. Like many in the GOP argue, I think a lot of optimal reforms include severely curtailing, privatizing or eliminating these agencies entirely. They need to lose their government guarantee at the very least. We've done too many things in this country to over encourage home ownership including tax subsidies for home ownership and deductibility of mortgage interest. This has results in some nasty real estate inflation that ends up hurting the most responsible buyers, while encouraging irresponsible borrowing and lending exacerbated by congressional tinkering.
Frankly, I look at countries like Canada or Denmark that get by with much more stringent loan standards, and no Fannie/Freddie and people buy houses there just fine with much more stable housing markets. We need to scale down government intervention in the real estate market over time to remove these dramatic price fluctuations. In the long run, it will make housing more affordable.
However, we need not do it right this second. The problem is not enough time has passed for asset prices to stabilize and begin to reflate. Most of these price indexes started to collapse in 2007, and we need at least until 2011/2012 for many homes to stop deflating and begin to make a lot of these more whole. With the government owning one out of every two mortgages in the country, it's not exactly a disinterested party in this process.
Big losses taken now would have to be covered by the American tax payer if they are taken now. Does that sound good to you at the moment? But if we wait a few years, prices will have stabilized, the loan losses will be mitigated by some profits elsewhere and more restructuring will have taken place on older loans.
Any massive reform effort undertaken now could cause massive instability and make already difficult loans almost impossible to get, freezing an already challenged credit market.
This almost reminds me of the "mark to market" debate. Sure it's great in theory, but theories always have to be adjusted to the practical limits of any market. People need to be practical and stop trying to score political points.
I'd love to see these agencies eliminated and a freer market, but it's stupid for the government to shoot it's own balance sheet in the foot before these assets have started to inflate. When these loans start getting paid down, and assets start to rise, we can have this debate in a healthier way without setting off another crisis. Policy makers not only need to pick their battles, they have to get the timing right as well.
Disclosure: No positions

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