The near-collapse of Fannie Mae and Freddie Mac may have taken the markets and the financial media by surprise, but is something that CEI schlolars have been warning about for more than a decade.
In testimony in 2000 before the U.S. House of Representatives, CEI President Fred Smith issued this caution on the two government-sponsored enterprises: “Privatizing the profit side of the ledger while socializing the loss side is a sure-fire recipe for disaster. It was exactly that problem that so exacerbated the plight of the S&Ls in the ’90s.”
Smith warned of the “moral hazard” of Fannie and Freddie’s implicit and explicit government subisidies. In words that sound prescient today, he said: “These institutions hold a much larger portfolio of housing-related financial instruments (and a more concentrated form of assets) than did any S&Ls in days past. A systemic downturn in the housing market may lead them into increasingly risky lending practices as it did the S&Ls in years past.”
More of CEI’s historical warnings about the dangers of big-government in the housing sector, as well as some brilliant new material, will be displayed on the CEI.org web site in the coming days.