10 August 2013

Dean Baker: Fiddling with Fannie and Freddie Only Sets Us Up for Another Crash

Best leave the mortgage market in government control or abolish Fannie Mae and Freddie Mac entirely and let moral hazard rule
 
President Obama's announcement of his plans for a restructured mortgage market was painful for those who remember the bubble and crash. It seems as though he learned nothing from this disaster.

The key problem in the bubble years was the ability of private actors to profit by taking huge risks in issuing and securitizing bad mortgages, while handing the downside risk to taxpayers. This was the story with Countrywide, Bank of America, Goldman Sachs, Citigroup and the rest.

It was also the story with Fannie Mae and Freddie Mac in their prior incarnation, before the collapse of the bubble sent them into conservatorship. The pre-conservatorship Fannie and Freddie were run as for-profit companies. Their top executives made Wall Street-type salaries, pocketing tens of millions of dollars a year.

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