I will first start off by mentioning that I am not (at least not yet) an expert on these issues, so my thoughts are subject to change as my knowledge grows on the subject. As a result of my lack of expertise, you may want read this, this, and this first. Here are my favorite excerpts:
From Joseph Stiglitz (who I normally disagree with):
"Much has been made in recent years of private/public partnerships. The US government is about to embark on another example of such a partnership, in which the private sector takes the profits and the public sector bears the risk. The proposed bailout of Fannie Mae and Freddie Mac entails the socialisation of risk – with all the long-term adverse implications for moral hazard – from an administration supposedly committed to free-market principles.
Defenders of the bail-out argue that these institutions are too big to be allowed to fail. If that is the case, the government had a responsibility to regulate them so that they would not fail. No insurance company would provide fire insurance without demanding adequate sprinklers; none would leave it to “self-regulation”. But that is what we have done with the financial system."
From Dick Armey:
"Actions by Fannie and Freddie management and their regulators this year precipitated the current crisis. Under pressure from the Democrat-controlled Congress, the Bush administration lifted Fannie and Freddie's portfolio caps in February and reduced their capital reserve requirements in March. In this year's stimulus bill, Congress went further and nearly doubled the size of the loans that Fannie and Freddie can purchase or guarantee.
As a result of this reckless expansion, the government-sponsored enterprises (GSEs) now touch nearly 70% of all new mortgages. At the same time, they are insolvent by most measures. The ostensible purpose of Fannie and Freddie is to provide liquidity to America's housing markets. In practice, they are the source of systemic risk and instability in a time of need."
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