Christopher Mayer on the GSE ticking time bomb (2002)

An explosive concoction has been created with the GSEs. The GSEs have increasingly dangerous levels of debt, coupled with an implicit government guarantee that seems to encourage even more debt. In the case of Fannie and Freddie, they are publicly traded companies accountable to shareholders for delivering earnings growth that is going to be increasingly difficult to deliver as they grow to the limits of their market. Thus, they are faced with the prospect of lower earnings growth or of finding a way to expand into other (riskier) areas of consumer finance—and further spreading the threat of nationalization beyond just the mortgage market.

The only way to correct this problem is the same way all socialistic practices are corrected—the government’s involvement must be severed completely. Just because the GSEs have led a charmed life so far is no reason to infer that their future will always be so bright. Socialism is not dead; it is alive in institutions like the GSEs, which are for all practical purposes government agencies.

It has often been said that there are no free lunches. Surely, Americans cannot continue to subsidize (indirectly) mortgage finance without cost. What most Americans cannot see is that such subsidization of the mortgage industry has led to the assumption of a great deal of risk on the part of the taxpayer. The longer the GSEs are able to expand as they have, the more certain it becomes that someday taxpayers will have to bear the cost of such excess. Like Russian roulette, the longer you play, the more certain it becomes that you will bear the risk for playing.

~ Christopher Mayer, “Mortgage Market Socialism,” The Free Market, March 2002