Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

Abstract

The preferential legal status of Fannie Mae and Freddie Mac serves as one of a number of mechanisms by which the federal government encourages the consumption (and, arguably, the overconsumption) of housing in the U.S. economy-this one with an on-budget cost of zero. But economists are congenitally suspicious of programs that seem to offer something for nothing. After all, a federal guarantee of the deposits in savings and loans cost nothing for many decadesuntil the early 1990s, when it cost taxpayers about $150 billion (U.S. Federal Deposit Insurance Corporation, 1997). Furthermore, Federal Reserve Chairman Alan Greenspan (