TESTIMONY
Lawrence J. White
Professor of Economics
Stern School of Business
New York University
Before the
Subcommittee on Capital Markets and Government Sponsored Enterprises
Committee on Financial Services
United States House of Representatives
Hearing on
“Fannie Mae and Freddie Mac: How Government Housing Policy Failed Homeowners and Taxpayers and Led to the Financial Crisis”
March 6, 2013
There are at least two major policy lessons to be learned from the GSE experience: First, there are rarely (if ever) “free lunches” to be found in economic policy. The lower mortgage costs that the GSEs provided – ¼ of a percentage point on conforming mortgages – appeared to be a free lunch, since there were no budgetary implications at the time in connection with the GSEs’ special status and the “implicit guarantee”. However, the “lunch” has become costly indeed. It behooves the federal government to be extremely wary of situations where the financial markets assume that the Treasury will come to the rescue of a financial institution’s creditors.
Second, large systemic financial institutions – in this case, involved with residential housing finance – must be subject to rigorous prudential regulation, with high capital requirements at the center of this regulation. Anything less is an invitation to a repeat of this costly experience.
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