By now I think most people are aware of the blank check the government gave to Freddie Mac and Fannie Mae as part of the recently passed housing bill, but was this truly the best way to fix the problems of these government-sponsored enterprises (GSEs)? According to Alan Greenspan in an interview with the Wall Street Journal, this solution was “bad.” Instead Greenspan thinks that we should have nationalized the GSEs, wiping out shareholders in the process, restructure them and then sell of the pieces in order to form five to 10 private companies. Greenspan has long warned that the current structure of these GSEs threatened the nation’s financial stability, according to the Wall Street Journal, and Greenspan saw present circumstances as the perfect time to make a much needed change. Greenspan isn’t the only one with this opinion either; former Nixon Treasury Secretary George Shultz had these words of wisdom, as quoted in the same Wall Street Journal article: “If they are too big to fail, make them smaller.”
How the markets would react to the nationalization of the GSEs is up for debate, but Greenspan seems assured that things would be just fine. Right now the companies enjoy the full backing of the U.S. government, only the shareholders get to keep all the upside. So no risk and lots of potential for reward? Sounds like a pretty sweet set-up they have over there.
Typically, I’m not a big fan of government getting involved in business. I’ve always been of the philosophy that the market will work things out. But this circumstance is very different. The government has already intervened by granting these companies an official unlimited line of credit. We can debate whether or not they had one before, but now it is official. At this point, taxpayers are potentially on the hook for trillions of dollars; we have essentially taken on all the risk without the possibility for reward. This is obviously a horrible arrangement for taxpayers. While I don’t like the idea of keeping the companies under government control, that is not what Greenspan is calling for. He is saying that the government should take control of the companies only long enough to sell them off to private investors, who will form five to 10 smaller companies in the process. To me this plan seems much better then what we have in place. This solution also would work out much better in the long term, since it would increase competition. In addition, since there would be a bunch of smaller companies, we wouldn’t necessarily have to worry about a collapse in the market if any one of them went under. That means we wouldn’t have to bail them out if they made stupid business decisions, which is a winner in my book.
I don’t normally agree with Greenspan, but in this case I think he is on to something. The government offering up taxpayer dollars to keep two flailing giants afloat is a horrible plan, and the time has come for a change. Present circumstances offer us the chance to make a change and if Bush isn’t up to the task, I hope that the next president is.