Arnold Kling  

Greenspan's Concerns

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Federal Reserve Chairman Alan Greenspan tries taking on some sacred cows. In a logical assessment of the Social Security's future financial condition, he suggested ways to curtail the growth in future benefits. The response was predictable

Sen. Arlen Specter, R-Pa., called the suggestion ''outrageous, insipid, preposterous'' and ''the worst idea I ever heard of.''

On another topic, Greenspan argued that two large mortgage holders, Freddie Mac and Fannie Mae, pose a threat to financial stability.

In addition to capping debt growth at the two institutions, Greenspan suggested the two companies should be more focused on their core responsibilities, buying home mortgages from local lenders and repackaging them as mortgage-backed securities that can be traded rather than branching them out into other types of loan activities.

As a shareholder and former employee of Freddie Mac, I have my thoughts on this issue, but I do not want to go on at length. I would just say that, as with Social Security, Mr. Greenspan has a view that seems to me to be wise and balanced.

For Discussion. What background papers would you recommend on the issue Freddie Mac, Fannie Mae, and the U.S. housing finance system?

COMMENTS (6 to date)
Bob Dobalina writes:

I don't have a background paper to recommend, but I think the Fan/Fred issue has a simple solution:

Have congress vote to give them an explicit guarantee, or no guarantee at all. This limbo muddies the water.

Bob Dobalina writes:

Oh, and can anyone from PA tell me how Specter got and continues to get elected?

Bob Hawkins writes:

> ''outrageous, insipid, preposterous''

Outrageous and insipid? Reminds me of Cold War thesaurus-based propaganda about "the imperialist US Army's insipid offensive against the winsome people..."

John Coyne writes:

The only paper I've seen recently that deals with the implications of having such large GSE's with such large derivitave positions can be found here. Short of that, a good (though idealogically-tinged) background on Fannie and Freddie can be found on this post on the Ludwig von Mises blog.

Out of curiosity, do you have any opinion on the push to develop MBS markets in China and other parts of Asia, such as the one reported on in yesterday's FT?

R R Schweitzer writes:

There was a critiquing website somewhere that had much on FNMA (especially its political activities).

BUT - the answer is to break FNMA and Freddie into quasi autonomous regional units (like the Fed) and "merge" the two into one mortgage banker with a national "oversight" board, but separate corporations with varying shareholders.

Eileen M. Ryan writes:

Mr Greenspans remarks on how to save Social Security created fear in the hearts of many soon to be retired workers. He needs to check how the surplus funds are being used by Congress. From 1962 to 2001 Congress "borrowed" $700 billion, in FY02 $159 billion,in FY03 $155.6 billion The money goes directly into the federal government's general account (managed by the Treasury Department) making the surplus indistinguishable from other monies the government spends. My source-Congressional Budget Office. Consider the fraud, and waste Com. Barnhart is hoping to eliminate but remains a constant problem. Correct these items and SS will remain solvent for years. But then it is easier to increase the retirement age and decrease the earned retirement benefits.

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