It should be clear however what purpose is served by

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It should be clear, however, what purpose is served by the household leverage that is provided in the form of off-budget guarantees through Fannie and Freddie. This is what so far allowed successive presidential administrations to encourage ever-larger short-term consumption and spending during their tenures. It might seem odd that in a game between two political parties to get to the seat, both would agree on a strategy to promote housing finance at successively higher levels over time. The game, however, is not between the two parties, but between each current administration and the future ones (and ultimately current and future taxpayers). No President would want to shut down or bring onto the federal budget Fannie and Freddie’s debt or guarantees – until they have to be honored. Doing so would seriously alter the shape of that administration’s fiscal budget and force them to make hard choices that would produce long-term gains that would accrue only to future administrations. Instead, as long as possible, it would be better to let households spend more on housing, passing on the problem of dealing with housing guarantees to the next government, and so on. And while each presidential administration is working its way through its term, aided by Fannie and Freddie’s balance sheets and off-balance sheet guarantees, the competitive landscape of the financial sector is altered as they enter more mortgage markets, contributing to a downward spiral of lending standards, excess leverage, and an unsustainable bubble in housing prices and construction. In many ways, this is the ultimate Ponzi scheme of all. It reflects a deep failure of a society’s ability to govern its own governments. That in turn is generally a sign of poor quality of institutions. In the emerging markets, economists have generally argued this has to do with legal institutions such as the rule of law, creditor rights, and the protection of minority investors. In this case, it is the extent of involvement of state-backed enterprises, Fannie and Freddie, in private business. Ironically, it is another presidential administration that must take the steps to reform them. But we must guide the reforms to take a shape such that some future administration’s desire to restart the Ponzi scheme can be kept in check.
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131 9.2 Solutions to the Homeownership Issue 9.2.1 Lessons from Others We now return to the question of whether a government presence in mortgage markets is necessary for social goals relating to housing, even if these goals were desirable for some reason as government objectives. Based on our analysis in Chapter 7, the answer seems to be a resounding “no”. Despite their substantially lower level of government involvement, other countries have been as successful as the U.S. in promoting home ownership and affordable housing. Based on the cross-country evidence, it seems fair to conclude that there is no obvious link between the
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Christopher Reinemann
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