When Privatization Increases Public Spending, by Ed Glaeser: ...Most of the time, privatization does indeed reduce government expenditures. ... But Fannie and Freddie are the rare exceptions where the taxpayer is safer with them in government hands rather than private hands.
Fannie Mae has been a private entity since 1968. Since then, the federal government has proven itself unable to allow let it or Freddie Mac default. ... Given the trillions in mortgage-backed securities that are securitized by these enterprises, once a crisis occurs, the government faces the option of a bailout or risking financial Armageddon. Unsurprisingly, it chooses bailouts.
I sympathize with those who would like to end any prospect of a federal backstop for these enterprises, but we don’t have that option. ... And trying to would effectively tie the hands of future Treasury secretaries and chairmen of Federal Reserve. If the federal government is going to bail out Fannie and Freddie anyway, the fiscally responsible thing to do is to keep them in government hands.
Then the government can write strict rules that limit their behavior. They can be forced to charge high fees for guaranteeing mortgages. They can be tightly restricted in the types of mortgages they insure. If they remain government entities, the leaders of the House can play a large role in designing a structure that won’t cost future taxpayers billions.
All of that control disappears when the entities become private. They will be able to experiment with new products and cut their fees to expand market share. They will be able to hold billions, or trillions, of dollars in their retained mortgage portfolios. They will be able to go back to exerting enormous political influence.
If an entity is going to be able to gamble with taxpayer dollars, then we are far safer if that entity is a slow-moving government bureaucracy than rather than a nimble, profit-seeking company. ...
I also respect those who argue that Freddie and Fannie should just disappear. Other mortgage markets work perfectly well without such government entities. But it seems dangerous to go cold turkey on government mortgage insurance in our weak economy. ...
The government-controlled version of Freddie and Fannie seem likely to disappear over time — if lawmakers make sure they charges fees high enough to cover their costs. The great advantage of a slow transition to privatization through private competition is that the government will find it far easier not to bail out any new, purely private entrants in the market. ...
Once all the mortage insurance firms are private again, why won't they be bailed out in a crisis?