Archive for the ‘Freddie Mac’ Category

Kill Fannie & Freddie, but don’t replace them

January 23, 2010 1 comment

U.S. Rep. Barney Frank (D-Mass.) is probably right about abolishing Fannie Mae and Freddie Mac, which, as the article states, buy “loans from lenders, insuring them against default and supplying fresh cash to make more loans.” But replacing them with a single government-run entity because, according to Frank, “it’s important for the government to continue to play a role in fostering housing affordability,” is exactly the wrong thing to do since it’s precisely that notion that makes home-buying unaffordable for most in this country.

Artificially increasing demand for something necessarily diminishes its supply because more people exist in the market to drive up prices. This is one of the most fundamental laws of economics, and it’s one just about every school of economic thought agrees on.

The best thing the government can do to make housing more affordable is to get out of the process altogether. Let lenders keep their loans, rather than get them off their books by packaging and selling them to another entity that then sells them as securities. This would inject more sanity into the lending process, as lenders would no longer be tempted to sell homes to people who probably can’t afford them, as they do now because they won’t have to worry about the toxicity of subprime loans once they sell them to an entity like Fannie or Freddie (or whatever do-gooders like Frank and his ilk are eventually able to replace them with). Fewer people buying homes means existing home prices would have to come down to reach demand-and-supply equilibrium.

Computer prices have dropped; DVD players can now be bought for about what two DVDs cost; cars, flat-screen TVs, treadmills, plastic surgery — all of these once-outrageously-expensive things have become affordable to just about everyone, because — so far — the government has not established a right to them that must be facilitated by some government program. The market has worked.

But what prices have risen, instead of dropped, over the years? Tuitions, medical-care costs, home prices, and the cost of hiring new workers, to name a few — all things the government has determined it needs to “help” people to afford.

Curious, isn’t it?