Competitive Enterprise Institute | 1899 L ST NW Floor 12, Washington, DC 20036 | Phone: 202-331-1010 | Fax: 202-331-0640
Washington, DC, May 23, 2001 – The latest figures from the Congressional Budget Office indicating that Fannie Mae and Freddie Mac receive more than $10 billion in subsidies exemplifies the significant “moral hazard” posed by government-sponsored enterprises (GSEs). <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
Clearly, Fannie Mae and Freddie Mac were created for “good” purposes, to create a secondary market in mortgages and thus reduce housing costs. Now, however, the issue is whether such implicit government “insurance” acts to distort and possibly destabilize the marketplace? Whether the private sector might take over this function? The answer to both questions is a resounding “yes.”
Fannie and Freddie allocate government-protected capital to housing—and thus advance one American Dream. But that subsidized allocation frustrates other American Dreams (buying the new car, going to college, starting one’s own business) by making capital for these purposes less available and thus more costly.
A free market has no more important task than that of allocating capital. Which investments merit support, which do not? Making such allocations is never an easy task, which is why the market rewards investors handsomely when they are right—and penalizes them severely when they are wrong. Government guarantees weaken that process, anaesthetize our financial risk sensitivities, and threaten serious capital misallocations. This is what happened in the S&L crisis and the costs were massive.
The whole concept of government-sponsored enterprises borders on oxymoronic. At best, this mixing of private profits and political insurance creates marketplace confusion; at worst, it leads to a serious misallocation of capital and an increasing risk for American taxpayers. Whatever original purpose the GSEs served in the secondary mortgage market has long been fulfilled. The unique public-private role of the GSEs is no longer needed or appropriate.
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