In placing troubled mortgage giants Fannie Mae and Freddie Mac under federal control, Treasury Secretary Henry M. Paulson Jr. did what he had to do, and he did it pretty well.
The two companies are too big to be allowed to fail. They own or guarantee more than half of the $12 trillion mortgage market. Yet with housing prices plummeting, both have been hemorrhaging cash for months and can't raise enough capital.
They were less and less able to perform their ostensible function: to hold mortgage interest rates down. And they were headed toward insolvency, which could have brought on the collapse of the U.S. mortgage market, if not the entire financial system.
Paulson's plan will add billions of dollars to the national debt - how many billions is not yet clear. Among other things, the plan calls for the companies to continue buying mortgage-backed securities through 2009, thus perpetuating the tension between their financial safety and soundness, on the one hand, and their housing support mission on the other.
But at least government-appointed managers will be in charge, acting on behalf of risk-averse taxpayers rather than profit-hungry shareholders. The bailout would have cost much more if Paulson had waited.
The next step is to restructure the companies so that something like this does not happen again. Paulson's plan doesn't say how to do that, but it does give the next Congress and president time to take on the job and incentives to do so by the end of 2009. If they don't, the firms will have to start shrinking their portfolios and paying the Treasury a fee for their taxpayer guarantee.
In other words, Paulson has tried to prevent an actual collapse of Fannie and Freddie from dominating the rest of the election campaign - while putting both candidates on notice that permanent reform must be one of the next administration's first items of business.
We don't pretend to know the precise shape that change should take. But certain principles are clear. First, there must be no resurrection of the old "government-sponsored enterprise" model, with its implicit, widely assumed promise of government support.
Our sense is that the complex, risky business of securitizing mortgage debt should be left to the private sector, under appropriately tight government regulation.
Second, the restructuring of Fannie and Freddie should take the wider needs of the economy and the environment into account. The firms were launched in an era when homeownership rates were far lower than they are today. Now two-thirds of all households own their dwellings, and sprawl, traffic and global warming are major concerns.
In addition to whatever lift they get from Fannie and Freddie, homeowners benefit from a mortgage interest tax deduction, which is not capped to exclude wealthy buyers of expensive homes. Meanwhile, poor families looking for help with their rent often have to wait for years.
The Fannie-Freddie collapse is a reminder that housing subsidies, if any, should be as transparent - and as carefully targeted to those in need - as possible. This bailout is a sad and expensive necessity for the U.S. economy. It must become an opportunity to rethink not only the future form and function of two failed companies but also U.S. housing policy as a whole.
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