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Sunday, July 27, 2008

Summers and Poole on Fannie and Freddie

William Poole and Larry Summers discuss whether a bailout of Fannie and Freddie is needed, and what to do with Fannie and Freddie in the future.

Both agree action is needed to resolve the current crisis.

Poole: To permit the two mortgage giants to default would set off a worldwide crisis.

Summers: Anyone who cares about the health of the US economy should welcome the enactment of the Treasury’s rescue plan for Fannie Mae and Freddie Mac, along with other measures to support the housing market. While there is room for argument about details, the risks to the financial system were too great to allow delay.

And they are both concerned about the future if there are no changes in the way Fannie and Freddie operate.

Poole: the real question is not immediate survival of the loan giants but their long-term future.

Summers: No one should suppose, however, that the issue is now satisfactorily resolved, even for the short term.

What to do next? Poole has a simple solution, though it would take years to bring it about:

Poole: The wisest move, in the end, is to carefully let them wither away.

Summers would also liquidate the two firms, but leave some functions with government:

Summers: Once the crisis has passed, the federal government would divide their functions into government and private components, the latter of which would be sold off in multiple pieces. The proceeds could be used to fund the low-income housing support activity that was previously mandated to the GSEs.

More details here:

Too Big to Fail, or to Survive, by William Poole, Commentary, NY Times

and here:

The way forward for Fannie and Freddie, by Lawrence Summers, Commentary, Financial Times.

Update: Richard Green says "Is William Poole kidding?"

    Posted by on Sunday, July 27, 2008 at 01:08 PM in Economics, Housing, Policy | Permalink  TrackBack (0)  Comments (4)

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