The cloning of Fannie and Freddie

Few people would suggest cloning Fannie Mae and Freddie Mac, the government-sponsored enterprises (GSEs) now in conservatorship-limbo, as a template for the future. Yet there is a real risk that a small set of de facto GSEs will come to dominate our financial sector…

This is potentially ruinous. The strength of a market economy is critically undermined when firms charged with allocating capital make money by virtue of cozy political relationships rather than market acuity. Financial institutions will inevitably be beset by requests from members of Congress to “take another look” at rejected loan applications from favored constituents. And regulators trying to impose controls in the name of fiscal prudence will be slapped down by Congress when lobbyists warn that overly conservative capital requirements threaten to shut off the flow of capital. All this we’ve seen before.

It is a death spiral to which we are perilously close. We must pull up now.