Thursday, August 12, 2010

Good Op-Ed on Fannie and Freddy

This is one of the subjects I tend to be in full agreement with the Cato Institute on.   William Poole is arguing for the eventual closure of Fannie and Freddie because the mortgage market can stand on its own without help and that Fannie and Freddie were structure in a way that is fundamentally inefficient.

What I do take a little issue with is this:

In principle, it ought to be possible for government financial agencies to be self-supporting. But decades of observation have convinced me that there is no practical way to prevent the government from inserting hidden subsidies and special interest mandates into the agencies’ operations. If there are to be more federal housing subsidies — and I hope there are not — they should be legislated transparently.
There's a couple of things that can be drawn out here.  First, it does seem quite plausible that the government doesn't do a great job handling financial agencies and it shouldn't be involved.  I'd also add that neither does the private sector.*

More generally however, I question whether the problem is the nature of the activity and how badly lacking the legislation was rather than some general rule about government failure in these institutions.  First, housing is not investment, it doesn't produce anything.  While land can appreciate it's really distinct from capital or labor and does not actually produce anything, it's only value comes from scarcity.  The government should get out of the business of subsidizing any form of land ownership, it's basically a zero sum game so nothing at all is gained through promoting ownership over renting, prices get driven up to no one's advantage.

Second, these are tradable assets and part of the problem lies there.  A financial agency instituted for different purposes may fare better.  I specifically have in mind a financial agency dedicated to student loan service.  Why farm this business out at all?  Of course, heavy oversight would be needed to prevent the abuses at Fannie and Freddie but a financial agency dedicated solely to managing loans at strictly regulated rates, with no mission to innovate, seems plausible enough to me.  Of course, I'd guess the Cato scholar may have something slightly different in mind with financial agency than I do, I certainly agree wholeheartedly we don't need something like Fannie and Freddie in any business.

* Historically authority has not always been divided solely between the state and the private sector, it isn't even strictly divided that way today.  I don't know how to reinstitute the financial sector into an institution governed by a regime distinctly different from either existing public or private norms however.  Examples of other institutional divisions of authority would be the medieval church, medieval dynasties, city leagues, Chinese lineage structures, and several others that I could go into if I thought about it more.  More modern examples would be the EU, UN, standard setting bodies such as W3C, or multinational aid groups.  I can't emphasize enough how important thinking about institutionalization in a more nuanced fashion than the simple dichotomy of private/public is however.  Without these conceptions you are left with a static conception of the world that can't explain social change, given the massive changes our world has been going through due to the collapse of the Soviet Union, rapid technological change, environmental and resource pressures, etc. it is necessary to be aware of the existance of conceptions of the world that do allow for broad based social change.

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