Fannie Mae and Freddie Mac Plan Yet Another House of Cards

With a $154 billion bailout of Fannie Mae and Freddie Mac thus far, and regulators estimating the need for billions more, lawmakers in Washington have finally begun debate on how to wind down these two failed mortgage giants. While there is widespread agreement that they must be eliminated gradually to avoid market disruptions, plans for what will replace Fannie and Freddie have not found similar consensus.

One plan has recently gained attention on Capitol Hill, not the least because it has emerged from a surprising source. In early May the typically small-government conservative Rep. John Campbell (R.-Calif.) teamed up with Rep. Gary Peters (D.-Mich.) to introduce the Housing Finance Reform Act, HR 1859, mirroring an Obama administration proposal released earlier this year. Campbell apparently believes that Fannie and Freddie simply provided the wrong kind of government support for the housing market, not that government support itself was the problem. Campbell’s mind-set is reminiscent of Friedrich Hayek’s book on the failure of socialism The Fatal Conceit. If we could just get the right kind of government support in place, we could continue to subsidize low mortgage rates and the 30-year fixed-rate mortgage while simultaneously protecting taxpayers from the risk of future bailouts.

This time, it will be different, he says.............

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