Fannie and Freddie: What’s Beyond the Pale?

I always wonder, and I’ve never had it explained to me, what the consequences would be if we simply let Fannie Mae and Freddie Mac crash.  Without being an expert on these issues, and as someone who has a mortgage, what would be the problem with just forgiving all their mortgages (or discounting them and selling them off in a bankruptcy proceeding) and starting from scratch?  The shareholders would take heavy losses, but that’s true whenever any company goes under, and my understanding is that shareholders are losing out anyway on the bailout deal.

It seems like letting them go under would mean a few things: home prices would drop somewhat more than they already have.  It would be even harder than it is now to obtain loans to buy houses (though I can’t imagine it would be that much harder if prices dropped).  Those home prices are being held artificially high by the government interference caused by these agencies anyway; I’d love to see what their real un-tinkered-with value is.

And I’d love to have my mortgage forgiven or discounted!  Can’t homeowners get a bailout once in a while?

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2 Responses

  1. Hey Greg. I read your blog through FeedDemon and it is one away from economist Tyler Cowen’s (and others) Marginal Revolution. Interestingly Cowen had a post up responding to a question very much related to yours.

    http://www.marginalrevolution.com/marginalrevolution/2008/09/could-you-clari.html

  2. Even better…while posting that comment I got a call from Grinnell doing a fundraiser. I was there one semester and they’d like me to donate 🙂

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