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Minyan Mailbag: The Treasury and GSE Reform


It is sad indeed when the solution proposed by bureaucrats is the same as what caused the trouble in the first place.

Prof. Succo,

Today I read U.S. Treasury softens position on GSE reform. In the article it states: "The U.S. Treasury could accept giving a new regulator for Fannie Mae (FNM) and Freddie Mac (FRE) "discretion" to control the companies' $1.4 trillion mortgage portfolio, rather than impose a hard limit, a leading Treasury official said on Tuesday."

Perhaps it is nothing, but this whole situation gives me a very uneasy feeling. If I understand this correctly, the US Treasury will decide on a new regulator that will oversee government sponsored enterprises. Oh good, I feel better already as the government has the...government involved. Plus, seeing the words discretion and $1.4 trillion dollars in the same sentence doesn't make me feel any better.

It seems to me that because nothing "bad" happened to FNM and the Justice Department ended their probe (assuming bad does not mean not unable to file financials, incorrect financials and fraud) that there is now no need to limit the size of portfolios, instead just give someone discretion! Where did all those concerned politicians go?

Lastly if a mortgage portfolio limit does not get set for GSEs, how might this impact the velocity of money?

Minyan Bryan


It is sad indeed when the solution proposed by bureaucrats is the same as what caused the trouble in the first place. This is normal response given the character and nature of government directive.

The housing boom was greatly facilitated by the GSEs as the lender of last resort. When companies balked at making loans due to credit quality, the government, through the GSEs, stepped in. This helped the consumer continue to extract equity and increase borrowing for consumption.

As the Treasury now is really worried about the unwind of such, they naturally back off doing the right thing in hopes of deferring the pain of a housing unwind which would spill into consumption.

If the GSEs are allowed to pick up where they left off, however, it might not have the desired effect. In order to extract more equity and borrow more, the consumer needs the price of his house to go up more. In the current environment, even with new lending by GSEs, this is unlikely.

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