From Arnold Kling:
Anyone could see that the GSE dominance of the mortgage market was unhealthy. But the political process was unable to get the job done. What the central planners tend to forget is that political failure is even more entrenched than market failure.
Alex Tabarrok:
Maybe the taxpayers will have to pay today or maybe in some future tomorrow but the benefits of the GSEs are intimately tied to the costs - there is no such thing as a free lunch. The lunch may look free for a long time - as in the classic peso problem - but what that means is that when the bill comes due it will be big.
King Banaian:
Better will be to simply remove these guarantees; if it pushes mortgage rates up 25-50 bp, that would simply be recognition of a subsidy that has long since lost its usefulness.
King also points to Gerald O'Driscoll:
We must also realize that, whatever the deficiencies of the mortgage market in Depression-era America, that era is over. There is no "market failure" in housing finance today, except the one created by government-backed institutions dominating housing finance. Money flows where it is rewarded. Home mortgages are plain vanilla financial instruments, perhaps partly due to Fannie and Freddie. So by all means, let us thank them for their service as we bid them adieu in their present form.
Taken together, these sentiments sum it up nicely. The GSEs served a purpose. As the credit market developed, that purpose became somewhat less relevant than it once was. Yet, because of the implicit (now made explicit) government backing, they were able to offer what looked like a free lunch. As long as things remained stable, they helped shave a few basis points off of mortgage rates by absorbing some of the risk. If they only held loans of the highest quality (creditworthy customers, 20% down payments, etc), we wouldn't be having this conversation. But if those were the only loans that they held, the irrelevance of the GSEs would be more apparent and would have been vulnerable to being legislated out of existence.
So, given that people respond to incentives (and that includes people in government agencies [i.e. regulators and Congress]), it was entirely natural that the GSEs would bite off a little more than they could chew. They traded on their name and their implicit government backing, promising a little bit of a free lunch. But when things turned sour, we saw that the lunch was not free.
We live and we learn (though some people do not get the message the first time). Fannie and Freddie are too big to be allowed to fail. They need access to that lifeline that for too long we pretended wasn't ever going to be needed. Allow them to unwind this in an orderly way rather then letting it all unravel at once.
But then, for goodness sake, learn from this mistake. There is no reason for the GSEs to ever again be as large as they were.
UPDATE: Clarified the sentence about government agencies responding to incentives. I was referring to the fact that the regulators and Congress had no incentive to get tough with the GSEs and the GSEs then in response naturally expanded their reach.
