More Articles on Housing, and Fannie and Freddie

- McCain on Fannie Mae and Freddie Mac, courtesy of Lawrence Kudlow. I couldn't agree more.

- The dangers and consequences of the government directing industries and telling businesses what to do: here and here.

- An alternative view on government-sponsored enterprises.

This last line is highly deceptive: "Seventy-six years after it was created by a president whose administration was hostile to government intervention in markets, the FHLB stands as an enduring and (so far) effective example of socialism among capitalists." Quite to the contrary, the structure of the FHLB is far different from that of Fannie Mae and Freddie Mac, and far less socialistic. First of all, because its customers are also its members, the FHLB has a strong disincentive from acquiring an irresponsible amount of risk, which is precisely why it has "high standards." To see why the FHLB has yet to fail, note that "advances are heavily collateralized—the market value of mortgage collateral typically covers 125 to 170 percent of the advance. This protection explains why the FHLB System has never lost a penny on an advance." Still, the FHLB is not entirely without controversy, and it too likely encourages too much risk-taking on the behalf of its members, but the potential for problems is far less than for Fannie Mae and Freddie Mac. See the next article for a more in-depth explanation.

- Everything you could possibly want to know about GSE's, particularly Fannie Mae, Freddie Mac, and the FHLB.

I especially like this paragraph from the last article:

"The housing GSEs and their many advocates in the financial sector, in Congress and across the country argue that the housing GSEs have yet to cost taxpayers a nickel. They also note that stand-alone ratings of housing-GSE debt, that is, the bond ratings Moody’s and Standard & Poor would award absent implicit federal-government backing, are quite high. Finally, supporters point to the millions of Americans whose dream of home ownership became a reality due to housing-GSE activity. Because this reality is so vivid to most taxpayers, the downside of Fannie Mae, Freddie Mac and the FHLBanks is easy to overlook. An informed judgment about the proper scope of housing-GSE activity must take into account the potential costs of misdirected subsidies and financial instability."

Hmm, the GSEs have yet to cost taxpayers a nickel? A lot has changed since July 2004, and we should be wiser from it. There is no "wishing away" of risk simply by shifting it onto the taxpayer. We see now that because of Fannie Mae and Freddie Mac, we have had far too much irresponsible investment in housing at the expense of the stability of the financial markets.