Sunday, August 29, 2010

What To Do With Fannie and Freddie

My modest proposal for how to deal with Fannie and Freddie is not to shut them down or simply privatize them. There is a legitimate government role in facilitating the orderly operation of financial markets, including mortgage markets. My guiding principles are that no institution should become "To Big To Fail" with government assistance, private ownership and market operations are the basis of the American system, and that historical structures designed to diffuse decision making to the local level are compatible with our federal system.

Fannie and Freddie should be broken up and replaced with 12 banks each tied to a regional Federal Reserve bank. Each Federal Reserve Mortgage Association or Fremmie Mae would be controlled by a 12 member Board of Directors. One Chairman would be appointed by the Chairman of the Federal Reserve, three would be appointed by the local Federal Reserve Bank's board, four would be elected by the regional banks who would capitalize the local Fremmie Mae in return for preferred stock with special voting rights for those Director positions, and four would be elected by the public owners of common stock. The local Chairman would be subject to biannual reappointment and all others would serve for staggered terms of four years, subject to a recall provision. State and Federal legislative interests in permitting some level of popular, that is to say political, input into Fremmie operations would be mediated through the ability of the Congress to hold oversight hearings on the operation of the Fed and the Senate to hold confirmation hearings on Directors of the Fed, as well as the power of the States to influence local banks through licensing and regulatory procedures.

The Each regional Fremmie Mae should be required to maintain 75% of its assets in the form of mortgages backed by real property located within the Reserve district. The purpose of the regional Federal Reserve system should be to ensure the orderly operation of markets and sustained prosperity within their respective regions.

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