Beyond Regulation

HEADNOTE

It's time to privatize Fannie and Freddie.

I CANNOT DISAGREE WITH THE PRINCIPAL thesis of Scott Frame and Lawrence White's article; if competition develops for Fannie Mae and Freddie Mac, it may cause them

to take greater risks in order to maintain their profitability. The authors recognize that privatization is the only long-term solution to this problem, but see it as an unlikely policy choice. In the absence of privatization, they advocate stricter regulation as a second-best option. However, attempting to regulate Fannie and Freddie is not at all the same as regulating, say, banks or insurance companies. Indeed, the differences are so profound that stricter regulation of Fannie and Freddie is likely to be no solution at all, leaving the American taxpayer and the economy generally in the same position of jeopardy as exists today.

Although 1 have serious questions about the efficacy of bank regulation in general, bank regulators (in which group I include the regulators of savings and loan associations) have, over the years, been able to adopt regulations and impose them effectively on individual institutions through supervisory actions. However, in cases where a large part of the banking or S&L industry has been threatened with severe regulatory action, the record of bank regulators has not been so successful. A case in point is the S&L debacle of the 198Os, where the Federal Home Loan Bank Board (FHLBB) - then the regulator of savings and loans - failed to take the actions necessary to close down insolvent S&Ls until the problems of the industry had grown to monstrous proportions.