paper about MBS

Liability structure of the system’s debt

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Unformatted text preview: liability structure of the System’s debt obligations reduces the likelihood that a federal government rescue will be needed. Nevertheless, the FHLB System presents the same worrisome clash of social goals (supporting housing, and more recently supporting community development) and private ownership. We believe that the FHLB System’s basic role as a wholesale bank for its constituent financial institutions can be served by a wholly private entity that does not have the implicit subsidy of the GSE status. We are also worried that a GSE-based FHLB System might become 135 the vehicle for a new expansion of housing subsidies. Hence, we recommend its transformation into a wholly private structure. More generally, privatization of GSEs in some cases and evolving others into public- private partnerships with a limited lifespan for the public arm could pave the way for more balanced government intervention and sustainable growth in housing markets. 136 Epilogue “The difficulty lies, not in the new ideas, but in escaping from the old ones…” - John Maynard Keynes in The General Theory of Employment, Interest and Money (1936) On November 6, 1961, in the Sahara desert in Algeria, a pipeline from a natural gas well ripped open, leading to a gas fire that was 750 feet high. Nicknamed the Devil’s Cigarette Lighter, and fueled by 550 million cubic feet of gas a day, it burned for 6 months without any end in sight. The heat was so intense that anything within one-half mile, including the desert sand, melted. Then a Texan named Red Adair showed up. Red and his team dug deep down in the sand until a water source was reached. Using this new found water supply, they drenched the surrounding area for weeks upon weeks, thus cooling the area down. Then one day, fully covered in his fire suit that had been sprayed with water, Red calmly rode a bulldozer into the fire’s perimeter, placed drums carrying 750 pounds of nitroglycerine, and pulled away, igniting a massive explosion. The explosion successfully blew out the fire. It is generally considered the greatest achievement in the history of fighting oil well fires. The financial sector has its own version of the Devil’s Cigarette Lighter, and it is the government-sponsored enterprises (GSEs), notably Fannie Mae and Freddie Mac, with their unstable mix of capitalist profit taking and socialized risk. While no one disagrees with the idea of reforming the GSEs, it seems that the proposals for housing finance reform that are emerging from various industry groups do not represent a tectonic shift in thinking about government’s role in housing finance. For that matter, politicos are still mentioning the public mission of affordable housing and GSEs in the same breath. Regulators and policymakers need to stop dancing around the issue of what to do with the GSEs. A little less Fred Astaire, and a little more Red Adair is needed....
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liability structure of the System’s debt obligations...

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