Fannie and Freddie assistance plan

From the New York Times:

the Bush administration will ask Congress to approve a rescue package that would give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac and also lend to the companies to meet their short-term funding needs….

Separately, the Federal Reserve voted on Sunday to also open a lending facility for Fannie Mae and Freddie Mac, if they need emergency capital. The two companies would be able to post their own securities as collateral.

The plan calls on Congress to give the government the authority over the next two years to buy an unspecified amount of stock in the two companies. Over the same period of time, it would permit the companies to have greater access to the Treasury, by expanding the credit line that each company has from the Treasury. Each company now has a $2.25 billion credit line, set nearly 40 years ago by Congress. At the time, Fannie had only about $15 billion in outstanding debt. It now has total debt of about $800 billion, while Freddie has about $740 billion….

As part of the plan, the administration will also call on Congress to raise the national debt limit, people briefed on the plan said. And it will ask Congress to give the Federal Reserve a role in setting the rules for how big a capital cushion each company must hold.

The first thing I like about this plan is the fact that the ultimate determination of the level of risks to be absorbed by the federal government is being left to Congress. How much risk there is to the taxpayers in the various new lending facilities introduced by the Fed is subject to some debate, but that there is some risk, and that new loans from the Fed to the GSEs would increase this risk, is indisputable. One of the clearest lessons from history is that the fiscal and monetary functions of the government must remain separate. Pretending that we can deal with these problems with money creation rather than tax increases is too tempting to allow that door to be opened any further.

The second thing I like about the plan is that such action by Congress would take the form of a dollar limit– here’s how much we’re willing to stake, and no more– with residual losses presumably laid on the GSE creditors. I’ve argued that’s exactly the way the debate needs to be framed. Parenthetically, I can’t resist repeating here my suggestion that this is also exactly the approach we should be adopting for ever-growing federal health-care expenditures– let Congress decide how much it’s willing to spend rather than generate a wish list of all the things it would like to accomplish.

Granted, action by Congress can be a cumbersome process, often painful to watch. This I presume is why the plan includes a promise by the Fed to provide immediate lending, if needed, which I’m seeing as a kind of bridge loan. I would assume that may be quite a necessary and appropriate element of the plan.

I’ve railed before at the way politicians sometimes treat the debt limit as a political football, and I suppose there’s a danger of that here. This is a subtle issue, to be sure, requiring balancing an unknown risk of large fiscal loss against an unknown risk of spectacular financial catastrophe. Congress may get it wrong. But ultimately this is a decision to be made by elected representatives who can be held accountable for the outcome, one way or the other.

For my part, I urge Congress to say yes.