All that being said, there is a time when the Government has an obligation to intervene in the affairs of the commercial world. The Fed attempted to fix the problems brought on by the market crash in the 20s, and failed (albeit, they just didn't try hard enough, but I digress). The Government stepped in an produced jobs and welfare programs to drive the economy from the bottom up. The same Fed had Chernobyl-type problems with inflation in the late 70s, which, depending on how one defines "victory," the Fed was victorious over.
What good would the collapse of Fannie and Freddie do? The liquidity required to fund mortgages would go away. The credit necessary to buy houses would nearly vanish. All this would further exacerbate the problems of the housing market, as there would be no buyers for defaulted homes and homes that were "forced" onto the market (imagine a job change or a responsible buyer trying to pro-actively buy into a smaller, more affordable home). When credit tightens, people can't buy cars,
In the case of Freddie Mac and Fannie Mae, the fact is that the collapse of these lending giants would not benefit any market. Other banks already don't have the free capital to buy the companies. Hell, the Government decided it couldn't even afford to buy the companies, so they simply nationalized them. The simple fact is that the investors that provided the capital to support the loans, are also the capital owners that drive our economy through investments elsewhere. Furthermore, investors that are petrified to loan money to homebuyers will only cripple our real estate market. These investors will take their lumps; Lord knows that once the Government begins RUNNING Fannie and Freddie, those financially tethered to the company will not see any kinds of returns that they might hope to see were they run by competent, profit-driven executives.
The real key is getting the Government to declare "victory" early and getting out of the business of running companies. This is not the kind of situation that "more oversight" is going to help. We don't need additional bureaucrats looking into the lending process forever. Economic models might help predict the behavior of these kinds of collapses in the future, but there's no gaurantee, and if these models are put solely in the hands of bureaucrats, the process by which the legislation and regulation of the lending markets are controlled will be bastardized and perverted by the politics of the institution from which it derives its authority. Presidents will have more authority to impress the short-term economy to provide constituents with desired results, and this will come at the cost of further mortgaging our future. Inevitably, another collapse will come, and instead of blaming greedy executives and faceless corporations, we will find ourselves, once again, disappointed with the Authority to which we yielded our independence.
What is necessary in this situation, is for the Feds to get involved, make sure everyone involved takes their lumps (stockholders, execs, and borrowers), and then get out, leaving everyone with the lasting knowledge that if you're not careful, you will take your lumps again. Lenders shouldn't have been making these loans. Many of them will go bankrupt, and their stockholders will pay. Borrowers shouldn't have been so anxious to sign up for loans which, with their own honest personal assessments, they could not realistically repay. Some of them have gotten in over their head, and several of them will likely default, and they should. Investors should have been more shrewd with their money, looking for legitimate long-term investments (which real-estate has traditionally been) and performing due dilligence on their beneficiaries. Some of the bonds they purchased should default, and likely will. Allowing each group, in turn, to pay appropriately, for their own greed, while maintaining the stability and provided liquidity which Fannie and Freddie provide for the housing market is a good first step toward healing the real estate market, both short and long term.
It doesn't have to be just a Government handout. By propping up the market in the short term until liquidity and stability can be naturally achieved within the open market, it can (and should) be an investment in the American economy.
