Fannie and Freddie
This light-hearted piece by Daniel Akst from the NYT raises a lot of important points about prudential regulation, quangos and related issues.
For those not familiar with the cute nomenclature of US financial markets, Fannie (Mae) was a nickname for the “Federal National Mortgage Association”, but now appears to be its official business name. Freddie (Mac) was the Federal Mortgage Acceptance Corporation, or something like that. Both are stockholder owned corporations, established with a special government charter.
In other words, these are quangos in the original sense of “quasi-non-government organisations”,private business organisations, established with effective government backing, to perform what would normally be regarded as public functions.
Among the many problems with quangos, the one emphasised in this article is the implicit guarantee from governments to bail them out if they get into too much trouble. A very similar system applies to banks under the Australian system of prudential regulation. As I observed here
Most Australians would be even more surprised to discover that there is no public guarantee of bank deposits. Under current policies, the government does not guarantee deposits, but does nothing to dispel the general belief that such deposits are absolutely safe.
As Akst observes, this kind of implicit guarantee is the worst of all possible worlds. Governments should either
(i) withdraw the guarantee;
(ii) charge a commercially-sound fee, as in deposit insurance schemes; or
(iii) take ownership of the enterprise
Akst suggests taking Fannie and Freddie into public ownership, getting their books in order and then privatising them without the implicit guarantee. This is probably the best strategy in this case.