Bailout: A one-time proposition

Inter Lake editorial

If the Fannie Mae and Freddie Mac government bailout teaches us anything, it should be that steps must be taken to ensure that it never happens again.

Taxpayers are now on the hook for up to $200 billion to help the two companies endure expected losses on mortgage debts. Over the weekend, Treasury Secretary Henry Paulson announced that the Federal Housing Finance Agency would assume management control of Fannie and Freddie under a conservatorship that amounts to a "time-out."

The good news underneath all the very bad news surrounding Fannie and Freddie is that there is widespread recognition that they cannot continue as they have.

"There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form," Paulson said.

Democrats and Republicans have said they want to change the way the companies are structured. As usual, however, they have very different views on how that should happen.

Fannie and Freddie back three-quarters of all mortgages being made in the U.S., more than $5 trillion in debt, according to the Wall Street Journal. The sheer volume of debt is what is such a threat to the broader U.S. economy, and the reason why the bailout was deemed necessary.

Fannie and Freddie are government-sponsored enterprises owned by private shareholders but backed by Congress to carry out a public mission of sponsoring "affordable housing."

That in itself is a problem - capitalist entities that are supposed to bear a degree of risk for investors that also have the implicit backing of U.S. taxpayers?

Some Republicans are rightly calling for shrinking the amount of lending that Frannie and Freddie can support, with an eventual divorce from federal support. That is the surest way of seeing to it that taxpayers won't be asked to bail them out again some time in the future.

Some Democrats are also willing to consider new business models that would safeguard against that risk, as long as there is a mechanism that will ensure the continuing social mission of backing affordable mortgage financing.

That may not be enough. But action must be taken to address the volume of lending, the risk that poses to the broader economy and future taxpayer liability.