Greenspan the Free-Market Maestro & the GSEs

For a devout follower of Ayn Rand, Alan Greenspan is weird even by Randian standards. I do not hold him in high regard like many on the Street--the Maestro they call him--but I do not hate him like some others do either. However, whatever Greenspan says always seems contradictory and meaningless to me. Consider his latest view that the GSEs, Fannie and Freddie, should be nationalized:

His quarrel is with the approach the Bush administration sold to Congress. "They should have wiped out the shareholders, nationalized the institutions with legislation that they are to be reconstituted -- with necessary taxpayer support to make them financially viable -- as five or 10 individual privately held units," which the government would eventually auction off to private investors, he said.

Taking a page out of William Ackman's playbook--although Greenspan is no famous short seller--Greenspan implies that the GSEs should be nationalized without any material problems. Why is it that all the famous and "smart" people on the Street always call for nationalization well in advance of any deterioration? It wasn't even an year ago when, as you recall, Jim Cramer was calling for the nationalization of the bond insurers. One might imagine that Cramer was calling for that in order to save his own friends and his personal investment positions; but what about Greenspan?



I have no qualms with breaking up Fannie and Freddie. They are clearly way too big and would be better off operating as smaller, more nimble, entities.

One can also argue that they shouldn't be backed by the government since it privatizes profits and socializes risk. But I suspect liberals and conservatives will disagree on that. If you want to promote home ownership then the current arrangement makes sense. The government has to pay up if it wants some service (in this case improved home ownership) to occur. This is no different than the government paying to build roads to lowly populated rural areas (huge profits accrue to private construction companies while risk with any debacle lies with the governemnt.) It would be even worse--far less efficient and more bureaucratic--if the government owned these GSEs outright while maintaining the home ownership mission. Some question the benefit provided by the GSEs but you need to look no further than the current situation, where the GSEs are the only ones providing liquidity in the real estate market, to see how they can be helpful in times of stress. The housing market, and consequently the US economy, would be in far worse shape right now if it weren't for the GSEs.

The real question is whether government should be in the business of promoting home ownership. For now, no one with any power or influence has come against this notion. Perhaps the best thing would be if the GSEs promote home ownership during times of stress (depressions, wars, recessions, etc) while stepping back during prosperous times--the ideal Keynesian strategy. Unfortunately, such thinking has always remained theoretical given that government rarely downsizes during prosperous times as needed.

Going back to Greenspan, his crystal ball seems some light in the real estate storm:

"Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009," he said in an interview...

However, true to Greenspan's infamous opaque nature, he hedges by saying that the date may futher off:

Tracing a jagged curve with his finger on a tabletop to underscore the difficulty in pinpointing the precise trough, he cautioned that even at a bottom, "prices could continue to drift lower through 2009 and beyond."