Debt Dangers Lurk In Two Government Sponsored Enterprises
July 13, 2000
Last month, Federal Reserve Chairman Alan Greenspan shocked Wall Street and Washington by warning that the federal government's two giant home finance agencies, Fannie Mae and Freddie Mac, impose large, hidden costs on taxpayers. Moreover, the two government-sponsored enterprises (GSEs) have more than tripled their debt obligations over the past decade.
Experts say that as fast as the federal government retires its debt, the two agencies add to it.
- Debt of the two agencies soared from $400 million in 1990 to $1.4 trillion this year -- and is expected to approach $2 trillion by 2003 or 2004.
- By then their combined debt may exceed the publicly-held national debt.
- While the federal government has retired about $400 billion in federal debt since 1998, the two agencies have matched that by spending $1 for each $1 retired.
Greenspan warns that the $6 billion in annual subsidies to the two agencies "are, of necessity, at the expense of other federal or private-sector initiatives and hence are ultimately financed by households, either through taxes or reduced accumulation of wealth."
Since the debt of Fannie Mae and Freddie Mac is backed by home mortgages, there is no immediate crisis so long as housing markets remain firm. But, experts warn, if the market turns down taxpayers could very well be on the hook to bail the agencies out.
U.S. banks hold so much Fannie Mae and Freddie Mac debt that, according to Standard & Poor's economist Michael DeStafano, "If a GSE failed, it would probably take the banking system down with it."
Even more worrisome is that the GSEs have shown increasing interest in expanding into commercial activities beyond their original charter.
A number of economists say it is time for Congress to push privatization of the two agencies.
Source: Stephen Moore (Cato Institute), "Will Fannie Mae, Freddie Mac Still Pick Taxpayers' Pockets?" Investor's Business Daily, July 3, 2000.
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