Estimating and managing the federal subsidy of Fannie Mae and Freddie Mac: Is either task possible?

Estimating and managing the federal subsidy of Fannie Mae and Freddie Mac: Is either task possible?

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Article ID: iaor20001301
Country: United States
Volume: 11
Issue: 1
Start Page Number: 81
End Page Number: 116
Publication Date: Jan 1999
Journal: Journal of Public Budgeting, Accounting and Financial Management
Authors:
Keywords: management, government, finance & banking
Abstract:

Fannie Mae and Freddie Mac receive explicit and implicit off-budget subsidies from the federal government. This paper reviews the methods to estimate the dollar amount of the subsidies. None of the three techniques to estimate the indirect subsidy yield accurate point estimates. They do suggest that Fannie and Freddie could receive billions of dollars in subsidies in some years and much smaller amounts in other years. However, assessing the size of the implied subsidies is most valuable in demonstrating that Fannie and Freddie, not the federal government, control their size. Efforts to improve federal control face significant difficulties including informational asymmetries and the political incentives that have led to the status quo. These drawbacks bolster the rationale for eliminating federal support for Fannie and Freddie.

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