Tuesday, September 09, 2008

Fannie and Freddie: where should they go now?

I heard Senator Chris Dodd, head of the banking committee, being interviewed on NPR this morning.

He sounds like he's really going to miss that F&F lobbying money; the new entity isn't allowed to lobby. He won't be the only one.

Dodd believes the GOP want to liquidate F&F. He feels that will end 30 year fixed-rate mortgages in the US, pointing out that other nations don't have them.

I believe him. So now we get into interesting questions -- should we be subsidizing home purchases and creating 30 year fixed rate mortgages?

I'd like to hear DeLong and Krugman discuss this. I assume that this is supposed to be a form of income redistribution, but does it really work? Doesn't subsidizing loans also increase asset prices -- thereby reducing the initial purchase advantage?

If we want to distribute wealth, either for enlightened self-interest reasons of national peace and prosperity or beneficent reasons of social good, is this the best way to use our resources? Would we be better to liquidate F&F, forego the 30 year fixed rate mortgage, and instead shift funding to education or health care?

The answers to the questions depend very much on who's in charge.

If it's McCain/Palin, then the answers would be to keep F&F. They'd simply transfer the liquidation earnings to their financial backers -- the very wealthy.

If it's Obama/Biden I'd trust them to liquidate F&F and shift the subsidies to education or health care.

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