Former Treasury Secretary, Goldman Sachs CEO, and bailout architect Hank Paulson has a bit of a head-scratcher of an op-ed in the Washington Post this evening all about charting a course for sustainable housing policy in the US.
Like many on the right, Paulson lays much of the blame of the crisis on the GSEs, Fannie and Freddie, their role in blowing up the housing bubble, and their implicit guarantee from the Federal Government.
All that you know, though you may disagree with the extent to which the GSEs actually contributed to the crisis.
So what’s Paulson’s solution?
Oddly, it seems to be… recreate Fannie and Freddie.
We must eliminate the inherent conflict between public purpose and private ownership that was destabilizing to the GSEs. Congress could eliminate that tension by restructuring Fannie and Freddie to create one or two private-sector entities that would purchase and securitize mortgages with a credit guarantee explicitly backed by the federal government and paid for by the new entity. These privately owned entities would be set up like public utilities and governed by a rate-setting commission that would establish a targeted rate of return.
Oh jeez… explicit backing, private entities, a rate-setting commission, a targeted rate of return.
What about the whole not blowing a housing bubble part?
We should go further and reduce the subsidy for homeownership that helped create the crisis. The central place of homeownership as part of the American dream reflects a bias of our society that is unlikely to simply end. Policymakers may well decide that we should continue to facilitate lower-cost mortgages through a subsidy to mortgage credit guarantors. Even so, the scope of the subsidy should be reduced by rationalizing and reducing the missions of the FHA and the successor(s) to Fannie and Freddie. I would recommend limiting the availability of the subsidy to smaller mortgages or lower-income buyers or both. And the price the government charges this new private-sector entity for its credit guarantee must be high enough to leave room for a robust private-sector mortgage market that serves taxpayers and homeowners equally.
This is a recipe for trouble, because you know that over time the new GSEs would succumb to mission creep, and the potential pool of beneficiaries to get wider and wider over time, so that the “low-income” goal would soon dissipate.
Anyway, there is a case to be made for killing of the GSEs entirely and eliminating the government’s role in housing entirely. This type of shrunken Fannie and Freddie is definitely not the solution.