Fannie Mae and Freddie Mac: Privatizing Profit and Socializing Loss

Abstract

This book chapter describes the role of Fannie Mae and Freddie Mac in the ongoing financial crisis. The chapter first explains the hybrid public-private nature of Fannie and Freddie, which are what is known as Government Sponsored Enterprises (GSEs). Fannie and Freddie were originally chartered by the federal government to create a national mortgage market. The chapter then explains how the two GSEs morphed into extraordinarily large companies that profited enormously from their special relationship with the federal government, while providing only modest benefits to American homeowners. In what turned out to be a disastrous trade-off for American taxpayers, Fannie and Freddie ended up needing a bailout measured in the hundreds of billions of dollars. Ultimately, Fannie and Freddie exhibited the common failings of poor GSE design — after fulfilling their original purpose, they took on monstrously large lives of their own that defied political oversight. The chapter concludes that Fannie and Freddie should be privatized, with their remaining public functions assumed by pure government actors.