From today's edition of The Washington Post with respect to Fannie Mae and Freddie Mac:
http://www.washingtonpost.com/wp-dyn...031003944.htmlSixteen months after they were seized to prevent their collapse, the companies remain wards of the state, running a tab that has now exceeded $125 billion in what has become the single costliest component of the federal bailout for the financial system.
Some members of Congress have complained that the huge public commitment is unsustainable. But the administration has been reluctant to start reforming Fannie Mae and Freddie Mac, officials and analysts say, because the firms in their current form play an essential role in supporting the housing market at a time when it is still under severe stress. As other financial firms have exited the market and credit has seized up, Fannie and Freddie have been behind the vast majority of mortgages made since the start of the financial crisis. The companies now own or back more than half of all U.S. home loans.
The article notes that it will be at least another year before a plan is introduced to address the future of the two GSEs.
IMO, the GSE situation is a microcosm for the larger fiscal challenges that lie ahead for the U.S. The public commitment is likely unsustainable. But politics and economics associated with the housing market currently preclude serious reform, much as barriers lie ahead of any credible fiscal consolidation.
Having said that, the larger question with respect to the GSEs does not concern whether a permanent federal commitment is sustainable. Instead, it involves the far more wrenching issue of whether the U.S. housing market as it currently exists is sustainable. If not, then a federal commitment toward an unsustainable situation is, itself, not sustainable. At some point, foreign financing related to housing i.e., direct financing through the purchase of GSE securities or indirect financing through the purchase of Treasury securities could fail to increase at a rate necessary to sustain the current housing market model.
I suspect that the answer is that the market is not sustainable in its present form. As a result, reforms that address the role of housing-related tax incentives, size of downpayments as a share of purchase price, and transparency, among other components, will all be needed down the road even if the GSEs are restructured, broken into smaller pieces, and reprivatized (a possible solution that is far from assured). In addition, from the household perspective, saving will need to increase as a percentage of income, especially if public financing is constrained by the nation's long-term fiscal imbalances or a credible fiscal consolidation effort that will necessarily involve a combination of tax hikes, spending reductions, and mandatory spending program reform.