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The Debt Ceiling Walks the Red Carpet

If Congress and the president can't agree on spending cuts, they should consider ending Fannie and Freddie in exchange for a short-term increase in the debt ceiling.

Anthony Randazzo and Satya Thallam
June 27, 2011

If Washington policies were Hollywood celebrities, the cover of Us Weekly would perennially feature the debt ceiling. And like every Tinseltown starlet, we’d all want to know: “Who is she pairing up with?”

Today’s cover story would spotlight the continued failure of self-appointed matchmaker Vice President Joe Biden to find the debt ceiling a date to a congressional budget gala. Another story would discuss House Speaker John Boehner's desire to couple the debt ceiling with spending cuts of equally stunning looks and charm. The story on President Barack Obama would note that he prefers the debt ceiling to walk the congressional red carpet alone, while the Tea Party would be quoted as saying the debt celing should "just stay home." And according to certain Senate Republicans, if they were given the chance to play cupid, they’d marry a debt ceiling increase to a balanced budget Constitutional amendment.

The debt ceiling itself is paralyzed with indecision. Yet there is another option the gossip pages haven't mentioned: a sunset date for Fannie Mae and Freddie Mac.

Once a box-office superstar, these government-sponsored enterprises (GSE) are no longer on anyone’s “hot list.” Congress suffered through a decade-long abusive relationship with the pair, and now has little desire to address a problem which they themselves enabled. Meanwhile, Fannie and Freddie's rockstar, pre-crisis partying has left taxpayers with a $6.5 trillion liability hangover. Since the 2008 bailout, taxpayers have coughed up over $160 billion to cover losses at the two mortgage giants, with a potential tab of $400 billion.

Even Fannie and Freddie's erstwhile publicist, Rep. Barney Frank (D-Mass.), dropped them from his client list, saying last year, “I think they should be abolished.” Unfortunately, the complicated nature of winding them down, combined with a weak housing market, has frightened most on Capitol Hill away from dealing with the mortgage giant prima donnas.

But the debt ceiling debate is the perfect time to act. Fannie and Freddie are as much of a budget issue as Social Security or Medicare. The Congressional Budget Office counts them as federal agencies when it analyzes budget spending. And given the importance of housing recovery to future economic growth, they are critical to fiscal stability as well. Leaving them as perpetual wards of the state is itself a threat to America’s long-term debt.

So if substantial spending cuts don’t end up walking the red carpet, and entitlement reform is stuck filming on location, putting an expiration date on the existence of Fannie and Freddie would be a big win for fiscal responsibility. Think of it as celebrity rehab, which—as we all know—doesn’t work without a real commitment.

First, the legislation should be simple, just a few lines mandating that by September 30, 2016, the congressional charters of Fannie Mae and Freddie Mac would expire and they would have to shut their doors. The Treasury Department has already suggested that they could be wound down over this timeframe.

This would give the market plenty of time to transition from near complete dependence on GSEs for housing finance towards private capital as the support for the mortgage market. This should also be enough time to substantially wind down the balance sheets of Fannie and Freddie and sell off their assets to the private sector.

Second, this legislation would not have to outline the wind down process. Fannie and Freddie’s regulator, the Federal Housing Finance Agency, has all the authority it needs to raise the GSE guarantee fee, decrease GSE portfolios, and lower the maximum loan size a GSE can purchase or securitize. Using these tools, Fannie and Freddie could be phased out of the mortgage finance world, and the regulator could manage the process while monitoring its impact on the housing market to try and lessen any shock.

Furthermore, the sunset date would provide Congress with a ticking clock if it wanted to take responsibility and direct the process.

While the kind of spending cuts and entitlement reforms many House Republicans are now clamoring for may be advisable, their scope and ambiguity thus far makes them unlikely arrivals with a debt limit increase that already has its ticket in hand—indeed, it’s a reality one could only imagine on TV.

We suggest a targeted debt limit increase that lasts only through the end of fiscal year 2011, leaving any futher increase as a component of the FY2012 budget debate. Because reforming the housing finance market is important for fiscal stability, home affordability, and economic recovery, a sunset date for the GSEs paired with a short-term increase in the debt ceiling through the end of this fiscal year would be a match made in heaven.

Anthony Randazzo is Director of Economic Research at the Reason Foundation. Satya Thallam is Director of the Financial Markets Working Group at the Mercatus Center at George Mason University. This column first appeared at Reason.com.


Anthony Randazzo is Director of Economic Research


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