NCPA - National Center for Policy Analysis

Fannie And Freddie Attracting More Criticism

November 28, 2000

Have Fannie Mae and Freddie Mac become so huge that they could undermine the health of the entire U.S. financial system if they were to fail? That is the nightmare scenario that increasingly haunts economists.

Even if the two institutions remain stable, other questions have begun to surface.

  • Federal Reserve Chairman Alan Greenspan questions whether the size and growth of the two quasi-governmental mortgage lenders distort the economy by attracting investment to housing that might otherwise go to other private-sector initiatives -- such as productivity-enhancing plants and equipment.
  • He also has raised questions about the companies' advantages over private-sector competitors -- such as their ability to borrow more cheaply than other companies because of their ties to the federal government.
  • A recent study by a Fed economist and two other researchers questions whether the so-called secondary market for mortgage loans -- which Fannie and Freddie dominate -- helps lower the cost of borrowing for home buyers.
  • If it does not, then the subsidies the two institutions receive could be challenged on the basis that the cost to American taxpayers cannot be justified by the alleged savings to consumers.

Such questions are putting Freddie and Fannie officials, as well as their very vocal and dedicated partisans, on the alert -- and on the defensive.

It doesn't help their cause that many of the questions are coming from the Federal Reserve, which has never been held in higher public esteem than it is today.

Source: Patrick Barta and Jacob M. Schlesinger, "Criticism of Fannie Mae, Freddie Mac Rises," Wall Street Journal, November 28, 2000.

 

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