A Phil Hall Op-Ed: On Nov. 12, 2009, the American Enterprise Institute (AEI) sponsored a seminar Washington, D.C., entitled “Is it Possible to Reprivatize the U.S. Financial System?” At the time, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac had been in federal conservatorship for 14 months, and numerous plans were being floated on how to enact long-overdue reform to those troubled entities.
Alex J. Pollock was a resident fellow with the AEI at the time and he served as the seminar’s moderator. At the launch of the event, Pollock opined that mortgage funding was “being done almost wholly by the government. This includes the high intensity use of the Federal Reserve’s balance sheet to finance Fannie Mae and Freddie Mac so they can buy mortgages. Of course, this brings us to the balance sheet of the Federal Reserve – most interestingly, it looks like the balance sheet of a commercial bank as opposed to a central bank.”
Another presenter during that seminar was Jay Brinkmann, the chief economist and senior vice president of research and economics for the Mortgage Bankers Association. He might have had the best line during that event when he asked, “How do you privatize something with ‘government-sponsored’ in its name?”
But when considering whether to completely shut down Fannie Mae and Freddie Mac, Brinkmann asked, “If we phase out the GSEs, who supports the mortgage market as we go forward?”
That question was answered during the seminar by Mark Olson, co-chairman of the board of Corporate Risk Advisors, who said, “Anything with a discreet income stream can be privatized.”
Now, you might be wondering why I am devoting this column to a seminar that took place in November 2009, describing a possible future that never happened. Well, that’s the point – there was the potential for a viable, invigorating and highly profitable secondary market that would not be completely under the control of the federal government. Back in 2009, there were articulate concerns being raised by some of the smartest thought leaders in the housing policy sector that federal conservatorship of the GSEs would result in the secondary market being monopolized by Washington bureaucrats who had no interest in private-label competition.
Aristotle is credited with the phrase “Nature abhors a vacuum,” and that resonates with Olson’s observation about a privatized secondary market rising from the GSEs’ ashes. Olson forecasted a very different housing policy future that could have occurred if Washington was willing to take its hands off the secondary market and let the private sector function properly.
Aristotle was not cited in the 2009 seminar, but the moderator Pollock did recall another titan of the ancient world: the statesman Cincinnatus, who was called from his farm during his elder years to lead Rome during a period of sudden crisis. When the crisis was over following a brief period of tumult, Cincinnatus resigned his leadership and went back to his farm.
Pollock pointed to Cincinnatus as the example for the Washington bureaucrats to follow in dealing with the federal conservatorship – come in, handle the temporary crisis and then leave when the work is done. But here we are, 14 years after that seminar, and the crisis atrophied into a status quo that no one is talking about anymore. The 15th anniversary of the GSEs’ federal conservatorship is a few weeks again and all of these years later we’ve made absolutely no progress in GSE reform.
Well, here’s a rueful reminder of a future that could have been. What a shame.
Phil Hall is editor of Weekly Real Estate News. He can be reached at [email protected].