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the upper end of our estimates of annual funding advantages ($13.1 billion). This is a conservative conclusion, because some of the funding advantage should be attributed to the GSEs’ inherent efficiencies, the liquidity they bring to the market, and, as Hubbard (2004) maintains, their low risk of failure, rather the GSEs’ nexus with the federal government.

Given the important contributions of the GSEs, major new restrictions on the scope of their operations should be introduced only if they are clearly necessary. Those calling for new portfolio restrictions assert that the GSEs’ pose systemic risk, but they provide no clear delineation of how the GSEs’ activities could lead to a major financial crisis. Others who have reviewed the GSEs’ participation in the debt

Revisiting the Net Benefits of Freddie Mac and Fannie Mae

and derivatives markets find that these markets are resilient and that the GSEs’ are not a threat to their stability. Furthermore, researchers who have examined financial operations of the GSEs conclude that their risk of default is low and their risk-based capital standard requires that they meet a high standard of safety.

Consequently, the prudent approach to oversight of Freddie Mac and Fannie Mae is to concentrate on monitoring and regulating risk. Introducing new statutory limits on their portfolios would not only fail to reduce risk but also have undesirable consequences for homeowners, the housing market, and the economy as a whole.

Conclusions

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