Free Essays

Government Reform

Another response to the current problem has been to expand the powers (and market share and profits) of the two major government- sponsored enterprises (GSEs): Fannie Mae and Freddie Mac. Until recently, the Bush Administration and some in Congress were working to diminish their role as a consequence of mismanagement, the concentration of risk, and misbehavior over the past decade or more. Despite the presumed intense federal oversight of these two GSEs, both of them found themselves mired in allegations of massive accounting fraud in the early part of this decade.

More recently, and again despite federal oversight, both have suffered major losses—almost $9 billion in the second half of 2007—from bad mortgage investments in their most recent fiscal year. Others see a bigger role for the Federal Housing Administration (FHA), but FHA loans experienced a higher default rate than subprime loans from 2003 through 2006, and more than 14 percent of FHA borrowers are now behind in their payments.

As recent history reveals, there is little reason to have much confidence in a relief effort that relies upon a suspect process implemented by suspect institutions. While only a few of these proposals have been acted on, the threat of a worsening economy and the prospect of an upcoming presidential and congressional election may encourage many members of both parties to succumb to the temptation O f a massive bailout. As noted, the history of such government intervention in housing markets has not been one of notable success.

Many of the proposals now on the table would simply carry on that tradition.

REFERENCES

Rick Brooks and Constance Mitchell Ford, “The United States of Subprime,” The Wall Street Journal, October 11, 2007. 3 Aparajita Saha-Bubna and Carrick Mollenkamp, “CDO Ratings Are Whacked By Moody’s,” The Wall Street Journal, October 27-28, 2007. Karl E. Case: “The changing housing market: A bang or a whimper? ” New England Public Policy Center at the Federal Reserve Bank of Boston. December 2005.

Ronald D. Utt, “Time to Reform Fannie Mae and Freddie Mac,” Heritage Foundation Backgrounder No. 1861, June 20, 2005, at  www. heritage. org/Research/GovernmentReform/bg1861. cfm. James R. Hagerty, “Fannie, Freddie Shares Suffer Hit As Mortgage-Default Fears Mount,” The Wall Street Journal, March 11, 2008, p. A3. Editorial Board, “House of Paulson? ,” The Wall Street Journal, October 16, 2007. Harvey Rosenblum, “Fed Policy and Moral Hazard,” The Wall Street Journal, October 18, 2007.