, Robert Kavesh Professor in Economics and Deputy Chair of the Economics Department, testified on March 6, 2013 before the Subcommittee on Capital Markets and Government Sponsored Enterprises at their hearing on “Fannie Mae and Freddie Mac: How Government Housing Policy Failed Homeowners and Taxpayers and Led to the Financial Crisis.”
Professor White traced the history of Fannie Mae and Freddie Mac, and discussed the role the two government sponsored enterprises (GSE) played in the housing bubble that stretched from the late 1990s to the mid-2000s and the subsequent housing collapse and financial crisis.
“There are at least two major policy lessons to be learned from the GSE experience,” Professor White asserted. “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,” he continued, “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.”
Professor White served as a Board Member of the Federal Home Loan Bank Board during 1986-1989 and as part of his governmental responsibilities was one of three Board Members of Freddie Mac.