Hybrids like Fan and Fred are a bad mix
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TEXT OF COMMENTARY
KAI RYSSDAL: Chances are we wouldn’t be dealing with the problems at Fannie Mae and Freddie Mac were it not for those three little letters we’ve been talking about today: G, S, and E — Government Sponsored Enterprise. Fannie and Freddie have a curious hybrid relationship with the federal government. It’s helped more Americans own homes. Sure. But it’s also why taxpayers might eventually be on the hook for billions in losses. Commentator Amity Shlaes says the solution’s completely clear.
AMITY SHLAES: Hybrids sound nice — hybrid vans. But hybrid companies are inherently unstable — especially companies that are a mixture of public and private.
Because Fannie Mae and Freddie Mac were hybrids, Washington didn’t oversee their every move. Because Fan and Fred were hybrids, they did things that a private company wouldn’t: take pay packages to a new extreme, invest peculiarly, expand egregiously.
Privatizing the pair now is what some conservatives are talking about. And privatization would have been a good move — 18 months ago. It’s awfully costly to assume all the obligations that Fan and Fred have now with their shares plummeting, so privatization in the classic sense probably won’t happen. Lawmakers will more likely continue what they did before: crisis management of the hybrid, periodic intervention. They’ll throw billions at Fan and Fred now and they’ throw millions later.
The better move is to nationalize Fan and Fred. OK, it’s conservative heresy to say it. But Britain nationalized Northern Rock. Our own FDIC nationalized Continental Illinois, one of the nation’s biggest financial institutions back in the ’80s. That worked so well few people even remember it.
If Congress owns Fan and Fred outright, it has to take responsibility for them. Lawmakers can cut out the bad parts of the companies and write down the bad news. The taxpayer will have to pay for that. But taxpayers would have had to pay anyhow — either when they get the next bill for the next intervention, or sooner.
A Congress that owns Fan and Fred can also do good. It can isolate the healthy parts and make them freestanding companies. Then some privatization would be possible. In other words, a Congress that owns Fan and Fred can get us all to closure on this dark story. Nationalization isn’t the best idea in the world, but it is better than pretend privatization.
The worst option of all is the likeliest: Fannie and Freddie remain hybrids. Then it’s only a matter of time before they crash and take the rest of us with them.
Ryssdal: Amity Shlaes is a columnist for Bloomberg and a senior fellow at the Council on Foreign Relations. Her most recent book is “The Forgotten Man.”
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