The Bailouts Of 2007 - 2009

The Journal of Economic Perspectives symposium on the bailouts also included an analysis of the federal government assumption of conservatorship of mortgage giants Fannie Mae and Freddie Mac by Scott Frame of the Federal Reserve Bank of Atlanta and Andreas Fuster, Joseph Tracy, and James Vickery of the Federal Reserve Bank of New York. Here again the bottom line so far has been a net financial gain for the government:

As of end-2014, the cumulative Treasury dividend payments by Fannie Mae and Freddie Mac have now exceeded their draws: specifically, Fannie Mae has paid $134.5 billion in dividends in comparison to $116.1 billion in draws, while Freddie Mac has paid $91.0 billion in dividends in comparison to $71.3 billion in draws.

And what did ordinary citizens gain from this?

Was it important to promote mortgage supply during this period given the already high levels of outstanding US mortgage debt? We would argue “yes,” for two reasons. First, mortgage origination was necessary to enable refinancing of existing mortgages…. Second, continued mortgage supply enabled at least some households to make home purchases during a period of extreme weakness in the housing market.

And I have separately examined the Federal Reserve’s participation in emergency lending and concluded that the Fed came out making a profit from its intervention as well.

Like Calomiris and Khan, Frame and coauthors suggest that a positive net cash flow is not the right metric:

As an economic matter, one cannot simply compare nominal cash flows but must also take into account that the Treasury took on enormous risk when rescuing [Fannie and Freddie] in 2008 and should therefore earn a substantial risk premium, similar to what private investors would have required at the time, in addition to the regular required return.

Here I disagree. A key argument for intervention was that private risk premia at the time were too high. Prices of risky assets and the volume of risky lending were depressed by fire sales and a scramble for liquidity and safety, which posed a danger of pushing the economy deeper into crisis. Yes, the government was assuming risk in all these actions, risks that ultimately would have been borne by taxpayers. But taxpayers also faced a very real risk of falling revenues associated with a worsening economic downturn. The contributors of the symposium were all correct in emphasizing the risks the government took in making the bailouts, and I agree with their warnings that we should only enter into such ventures with great reluctance and careful evaluation of the costs and alternatives. But I think an objective observer would conclude that this time, at least, it all turned out well.

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