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.

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.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • NAR||

    But if the government doesn't keep giving people houses, the economy will never recover!

  • some guy||

    Don't worry. Government will continue to heavily subsidize home ownership. It will be an easy letdown...

  • Team Blue||

    It was the banks! The EVIL banks!!!

  • Team Blue||

    Of course, our loyal Team Blue politicians DID force the banks to make shitty loans to people who had zero chance of making payments...

    ...but it was For The Children.

  • hmm||

    I just purchased an REO home from Fannie. That bitch has some serious paperwork issues. I felt good about all the paper work though. I'm sure it created or saved at least 2 jobs for some government employee.

  • Joe Matt||

    I'll bet the address was 157 Riverside Avenue.

  • ||

    You couldn't GIVE either FNM/FRE away today. As the article notes they owe the Treasury $160 billion and $400 billion in total losses covered by the UST is forecast. Who wants that kind of liability? (today)

    No one does.

    And you can't dissolve them because their bonds were USGovt backed long ago. To pay off their bonds at par would cost far more than $400 billion.

    This is why the zealous GSE-hating Boehner House won't come up with a "Kill the GSE's" bill as politically feasible as it would be.

    Its like a quadraplegic who is tossed a hand grenade - you're fucked.

  • ||

    Oh, and Boehner is a Christ-fag.

  • Barack Obama||

    You do Me proud, child.

  • ||

    May I suck your dick O great one?

  • ||

    Also, the only way for me to get off is cheese grating my dick. Tony you want to join me?

  • Barney The Frank||

    Hey, that's my job.

  • ||

    I must admit, I'm a Christ-fag as well.

  • ||

    You pussies can't step off the GOP plantation for a goddamn second, can you?

  • ||

    Fuck me Tony, fuck me!

  • ||

    Of course, I can't prove anyone on here actually IS on the GOP plantation... I just say shit like that because it makes my friends think I'm as Team Blue as they are.

  • Barack Obama||

    You're a good minion, shrike, but it's time to get back on MY plantation... boy.

  • Paul||

    You couldn't GIVE either FNM/FRE away today. As the article notes they owe the Treasury $160 billion and $400 billion in total losses covered by the UST is forecast. Who wants that kind of liability? (today)

    Paul Krugman?

  • ||

    That is why I laugh at the idiot posters here - everything is a binary suck-off.

    Krugman? Ron Paul? which one is the OBGYN and which one is the economist?

    Oh fuck - Elmer Ron Paul is a fucking GENIUS in Alabamastan!

  • ||

    End the Fed! End the Fed!

    Put a goddamn goldbug in thar!

  • Paul||

    That is why I laugh at the idiot posters here - everything is a binary suck-off.

    I prefer the Unary: "Christfag!11!" myself.

  • Paul||

    Oh, and by the way, Karl Marx was an economist too.

  • ||

    He wasn't just an economist... he's the guy I masturbate to when I go to bed.

  • Karl Marx||

    If I weren't dead, I'd let you suck my cock, shrike.

  • Mr. FIFY||

    You are aware, some people actually take Krugman seriously...

  • ||

    I'd much prefer if some revolutionary militia burned the Capitol to the ground, and spent the next few years with its boot on the federal government's neck forcing it to rapidly repeal 99% of its laws and departments, sort of like one of those really powerful secret organizations in all those really shitty Hollywood movies.

    I'd fucking hang John Kerry myself.

  • jacob||

    Where do I sign up.

  • ||

    I'll bring the rope and we can reuse it on several other's.

  • Barack Obama||

    You people are immoral, with your "fiscal responsibility" and "debt limits" and "balanced budgets." I AM THE WON! How DARE you!

  • ||

    Even though morality is a Christ-fag thing, I still agree with my lord and saviour, Barack Obama.

  • nikeshox||

    I must admit, you have a good point

  • Appalachian Australian||

    Are the negative consequences of more deficit spending worse than the short term consequences of a default?

    Last I heard, if the debt ceiling isn't raised, the federal government will find money in other nooks and crannies and will stop "non-essential" spending. This all sounds like a good thing to me.

  • ||

    Goddamn, you people are fucking stupid,

    IT'S OKAY WHEN DEMOCRATS OVERSPEND!!! Get it through your fucking hillbilly Christ-fag heads!!!

  • ||

    I wish I were alive... and not feeding pineapples into Hitler's ass.

  • ||

    I don't care if you're dead, John Maynard... I still love you.

  • Aimeng||

    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... really a nice article!

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