Fannie Mae and Freddie Mac Should Be Cut Down and Cut Loose

Cut the government-sponsored behemoths down to size and let the market take care of them.

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They are correct, but such good economic advice is too often trumped by politics. A new regulator is unlikely to be any better than the old regulator because the whole notion of a government-sponsored business is thoroughly politicized and inherently corrupt.

Fannie and Freddie may be "too big to fail," but that means they are also too big for taxpayer bailouts.

Potentially massive loans from the Treasury and Fed are no solution to their already excessive debt—the last thing they need is more. These two politically privileged companies pose a "systemic risk" to the economy precisely because they became much too big in the past two decades. Any serious solution must begin by requiring Fannie and Freddie to do what other troubled firms are routinely required to do—sell assets, raise capital, and reduce debt.

Fannie Mae and Freddie Mac need to be downsized and de-leveraged, relieved of special privileges and loan guarantees, and broken into small pieces agile enough to sink or swim on their own, without taxpayer support.

Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.