The Inevitable Bailout

Alex Tabarrok explains why even if disaster is somehow averted this time around, a Fannie/Freddie bailout is essentially inevitable:

A government bailout of the GSEs should not be a surprise. After all, for a long time the markets have been predicting that sooner or later there will be a very expensive bailout. What do I mean? According to Freddie Mac (quoting the OMB) "mortgage rates are 25 – 50 basis points lower because Fannie Mae and Freddie Mac exist in the form and size they do." Now, that is almost certainly an exaggeration but to the extent that interest rates are lower due to the GSEs some significant part of that is due to the market valuing the government's implicit guarantee. In other words, interest rates are lower because the market is valuing the implied insurance. Now, the whole point of insurance is that sometimes the insurer must pay. Thus market has been telling us all along that sooner or later the taxpayer was going to pay.

Meanwhile, it's of course nice to have mortgage interest rates be lower rather than higher. But as a policy objective to devote actual resources to, this seems like a pretty poor choice of priorities. For the most desirable homes, cheaper mortgage rates is only going to bid up the price. And for every person at the margin who's able to afford a home this way, but wouldn't otherwise, you have a large number of people who are simply buying somewhat larger homes than they otherwise would have (and, concurrently, developers building somewhat larger homes).

A big house is nice, obviously, but that kind of thing is substantially a positional arms race. But beyond that, houses -- unlike most kinds of comparably durable infrastructure -- aren't really productive investments that do anything. If we had fewer schemes to subsidize home purchasing then, over the long run people would buy smaller cheaper homes and more of the country's capital would be devoted to productive investments making us all wealthier (on average) over time, albeit without quite so many extra rooms.