Bob Van Order, a former chief economist of Freddie Mac, has a long and sensible piece describing what Fannie and Freddie are good for, and examining the problems they're currently facing. Along the way, he talks a bit about the upside of moral hazard, as it applies not only to Fannie and Freddie but also to big banks in general:
Since the Great Depression when financial markets really went crazy we have developed institutions to try to control financial panic. A big part of this development has been deposit insurance, which provides bank depositors with assurance that they can get their money no matter what their bank does. Most of the time deposit insurance has served us very well. We don't see bank runs to any great extent; in 1987 when the stock market crashed in a way that was not that different from 1929 we saw not a whiff of a bank panic...
Fannie Mae and Freddie Mac (NYSE:FF) are a part of this apparatus. They are usually referred to as Government Sponsored Enterprises or "GSEs." That is, they are enterprises (they are privately owned), but they have special charters and benefits primarily in the form of implicit guarantees, for which they do not pay...
Guarantees involve a subsidy, if they are not paid for. In FF's case their debt has been rated AAA or AAA+ because of the government connection; whereas on its own it has been rated in the low AA range. The difference in borrowing rates between the two is around a quarter of a percent to .40%, which is a rough measure of their subsidy. Banks get a similar subsidy, which varies from bank to bank. The subsidy is probably larger now.
The analogy with deposit insurance is deliberate. Banks are de facto GSEs. Indeed, so are most major financial institutions around the world, which is in part why we have had relatively stable financial markets for decades.
This is why I don't share Steve Waldman's worries about covered bonds. Steve thinks that starting up a covered-bond market would turn banks into de facto GSEs; I'm more inclined to believe that banks are de facto GSEs in any event.
Obviously, being a de facto GSE means that there's a moral hazard play and that the government will, on occasion, end up bailing you out. It also encourages excessive risk-taking, which is why all that regulation is needed. On the other hand, it does tend to mitigate financial panic -- even now, during the worst financial crisis since the Depression, there's been almost no sign of real panic, and the economy is continuing to grow. So there's something to be said for the government backstop.