Tuesday, March 8, 2011

The Future of Housing Finance in the U.S.

The New York Times is running a 'Room for Debate' segment on the future demise of Fannie Mae and Freddie Mac.

Adam Levitin, who in my opinion has been one of the sharpest analysts of the crisis for quite some time, joins with Susan Wachter to make the following point that I think is critical:

Privatizing the housing finance system means increased financial vulnerability for homeowners and greater systemic risk from the housing sector. The risk of the housing finance market is inevitably socialized -- unlike other markets, the government will always step in to prevent a collapse of the housing finance market.

That the housing finance system would be nationalized, and then privatized, is no surprise given our history.  But that's not the end of the story; as Levitin and Wachter warn, we may well end up having to nationalize it again, after an unregulated system collapses again.  I wrote along similar lines, albeit less succinctly and eloquently, in an article whose title (Nationalization, De-Nationalization, Re-Nationalization) captures the dynamic that Levitin and Wachter warn of.  Our ideological reflex for privatization is a very, very expensive habit. 

Mark A. Edwards

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