The real issue is: “what next?” The two government‐sponsored enterprises (GSEs) are going to be allowed to continue to expand their portfolios until the end of next year, but will then have to begin trimming back by about 10 per cent per year. In the past, Fannie and Freddie showered large sums on members of Congress to win votes and retain their privileged position. Although those payments are now illegal, Fannie and Freddie have many friends on Capitol Hill who believe the GSEs are essential to affordable housing; they will fight hard to maintain the status quo.
Fundamentally, the Fannie and Freddie debacle is about the role of government in a free society. If government is limited to protecting people and property, and individuals are allowed to keep the fruits of their labour and to bear the risks of loss, then capital will be efficiently allocated.
The secret to a harmonious financial system is to get institutions and incentives right. Experience has shown that market liberalism best directs resources to where they have the most value to society. The so‐called voluntary principle, based on private property and the rule of law, allows information to be effectively processed by those individuals who have a stake in the results. Effective private property rights mean that rewards and losses are concentrated on decision‐makers, not taxpayers. The hybrid nature of GSEs — whereby profits flow to shareholders and managers while losses are socialised — distorts institutions and incentives, and misdirects capital. Congress then calls for more regulation and delegates power to some regulatory agency to oversee the GSEs. However, when regulators have little to gain from efficiency, and losses due to lax regulation accrue to taxpayers, what incentive is there to be prudent?
Preserving the status quo by maintaining Fannie and Freddie’s crony capitalism would expand the size and scope of government, rather than make individuals responsible for their mistakes.