GSEs: What do they cost? What do we get?
The pursuing hounds are baying loudly now, with momentum building for increased regulation of the GSEs, Fannie Mae and Freddie Mac:
After staving off legislation for most of a decade, the companies now face a more-stringent measure than ones proposed earlier — which would raise capital standards while lessening their ties to the federal government and perhaps limiting executives’ compensation.– Wall Street Journal, 10-Jan-05, subscription required
At the moment, regulation appears focused mainly on the government’s financial exposure, a consequence of many things including the GSEs capital requirements. Wall Street Journal again:
Fannie and Freddie have been forced to give ground on one of the most contentious issues: the levels of capital the two companies must hold.
Meanwhile, government scrutiny is increasing on the affordability side of the bargain (what taxpayers get for granting benefits to the GSEs):
Over the weekend, Federal Reserve Board researchers released a study questioning whether the companies are fulfilling a basic mission: helping to stabilize mortgage rates by buying mortgage securities.
The [GSE] purchases, it said, had a “negligible” effect in narrowing the difference in interest rates of 30-year mortgages and 10-year Treasury bonds. Over the long term, the researchers found, the difference was “less than one basis point.” (A basis point is one-hundredth of a percentage point.)
You can’t do a proper cost-benefit analysis unless you know what something costs, and what you get for the expenditure. When it comes to the GSEs, opinions differ on both — and neither is an easy question — as we will see when I manage finally to write the Great Big Posts that these two topics deserve.
