September 04, 2007
Another suggestion for the GSEs
George Washington University Professor Richard Green has another suggestion for addressing the market distortions generated by Freddie Mac and Fannie Mae that I mentioned in my comments at Jackson Hole.
The issue I raised was that these two government sponsored enterprises (GSEs) financed an important part of the explosion of U.S. mortgage debt by raising capital at lower interest rates than makes economic sense on the basis of their balance sheets and risk exposure, and that this may have generated some undesirable externalities in terms of the implicit policies that the U.S. may be induced to follow in order to undo this risk. Whereas I proposed addressing this externality through direct capital controls, Green discusses another suggestion, which is to simply impose a Pigouvian tax on debt issued by the GSEs, so as to correct the market's mispricing of GSE debt.
Posted by James Hamilton at September 4, 2007 09:01 AMdigg this | reddit
Given the recent market dislocations, I suspect that the political pressure will be off Fannie and Freddie for awhile. Fannie and Freddie will point out to the politicians how well agency debt behaved versus non-agency debt and argue that they are all that stands between homeowners and reckless hedge funds that lever up and play the "carry" game.
Given the moral hazard and asymmetry in information involved in low income housing, a redistribution from Fannie and Freddie to underserved elements might makes sense. I doubt that will happen as Fannie and Freddie will make the most of this recent meltdown. According to the Washington Post, they spent $23 million in lobbying in 2005.
I also agree with Richard Green. It is a privilege to learn Economics from Hamilton and Flavin. I was lucky enough to have them as teachers in the early 80's.
Posted by: toddleem at September 4, 2007 09:31 AM
Perhaps we should be focusing on the problems that exist rather than making up ones. Clamping down on the agencies just served to produce the problem by the non-agencies. Making the non-agencies too big to fail will just reproduce the problem with that much less control over it.
Posted by: Lord at September 4, 2007 10:15 AM
I don't like this idea so much. Essentially, the Feds would be charging the GSEs a guarantee fee, moving the GSEs closer to "branch of government" side of the scale.
I prefer JDH's capital controls, which should move them closer to the "private enterprise" end.
Posted by: James I. Hymas at September 4, 2007 01:32 PM
The problem we are facing comes from government intervention. I don't really understand why more government intervention will solve the problem. It would seem that if we really want to bring confidence back to the loan market the government should announce they are getting out rather than increasing intervention.
Posted by: DickF at September 5, 2007 04:47 AM
For a tax to be "Pigouvian" the fee should balance the costs that the taxed activity impose on society. I didn't see any analysis in the article of how big those costs are, that would justify a particular tax level, whether 20 bp or something else. It seems that proposals for Pigou taxes (for example, to fix global warming) often face great uncertainties in determining reasonable tax levels.
Posted by: Hal at September 5, 2007 12:21 PM