GSE

Perhaps it shouldn't be when you consider Fannie and Freddie have a good chance of costing taxpayers more than the bailouts of the banks (-$7 b.), AIG ($36 b.), and GM and Chrysler ($34 b.) put together according to this Congressional Budget Office analysis of last month. In December, CBO estimated Treasury will end up spending $163 b. of taxpayer money to keep Fannie Mae and Freddie Mac afloat, and Treasury's Christmas Eve lifting of the $200 b. caps on what it can put into each gave me cause to believe the ultimate cost could be a lot larger. It all depends on a housing market rebound that hasn't happened yet.

As of this morning, we -- the taxpayers -- apparently own Fannie Mae and Freddie Mac.  Here's the press release from the Treasury, including remarks by Secretary Paulson and FHFA Director Lockhart.  I'm still catching up on the news, but this statement by Paulson caught my eye:

Based on what we have learned about these institutions over the last four weeks – including what we learned about their capital requirements – and given the condition of financial markets today, I concluded that it would not have been in the best interest of the taxpayers for Treasury to simply make an equity investment in these enterprises in their current form.

Governments habitually bail out enterprises deemed too important to fail. Are taxpayers better or worse off?

Unfortunately, we can't say definitively because we only observe the world under the policy that was adopted, not under the opposite policy.

That doesn't mean we can't make some educated guesses.  We made some money on the 1979 Chrysler bailout but lost a net $132 b. on the S&L bailout of the late 1980s.  There would have been a lot of jobs and income lost if we hadn't acted then, but it's hard to say how much.  On balance, we're probably better off, but it's impossible to prove.

Last Sunday, Treasury Secretary Hank Paulson proposed to temporarily increase the present law $2.25 b. Treasury lines of credit for the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, to allow Treasury to purchase GSE equities, and to establish a consultative role for the Fed in establishing GSE capital requirements.