I attended the Chicago Federal Reserve’s “Future of the Financial Services Industry” conference last week. A number of interesting presentations, but I had to keep looking at the cover of the program to make sure it was the future we were supposed to be talking about. In typical economist fashion, most of the discussion revolved around what had been done wrong in the past.

That aside, most of the topics that were presented revolved around the fate of the Government Sponsored Enterprises (GSEs)—particularly Fannie Mae and Freddie Mac—and, a related topic, what was to become of the securitization markets. Fed Chairman Ben Bernanke said that securitization would make a comeback, but that transparency, liquidity, and incentives reform are all needed. As regards the GSE’s, he stated that the biggest problem is unintended consequences due to the implicit guarantee. Because of this they are insufficiently capitalized and therefore, unsustainable. His answer is to privatize them, perhaps with a “deep backstop” provided by the government.

In a more “freemarketarian” manner, Alan Greenspan addressed both issues—saying that securitization should be allowed to “flourish” since it is not the primary issue in our current situation (but rather how it was employed). He also stated that the GSE’s should be broken up.

Austen Goolsbee (a U.C. economist who currently serves on the Council of Economic Advisors and as Chief Economist for the President’s Economic Recovery Advisory Board) made the statement that the way things are currently structured, we are basically “encouraging households to speculate in the derivatives market.” His suggestions included:

• Eliminate the tax advantages of second liens
• Don’t encourage mortgages that are prepayable
• Charge higher fees to refinance

There seems to be a consensus that securitization is good and should be encouraged (the question is how and how much?) and that GSE’s are bad and should be discouraged (again, how and how much?).

One thing is for sure, since the government is currently involved in 90% of US mortgages, and 95% of mortgage originations go straight to Fannie and Freddie, a break-up won’t be happening any time soon.

Bookmark It

Hide Sites