Publication Date
2010
Abstract
In September 2008 the United States government seized mortgage giants Fannie Mae and Freddie Mac Since that time the government has pumped 111 billion of new capital into these governmentsponsored enterprises Yet the future of these companies postbailout is far from clear As policymakers consider the future of Fannie and Freddie it is useful to remember that this is not the first significant bailout of a governmentsponsored enterprise The government also rescued the Farm Credit System in the 1980s This Article examines the historical cycles in which Fannie Freddie and the Farm Credit System have funded loans They fund more loans in good economic times but fund fewer loans in poor economic times In other words they fund loans procyclically with business and credit cycles By repeatedly providing bailouts however government officials demonstrate that they want these governmentsponsored enterprises to fund loans in a countercyclical manner This Article considers the advantages and disadvantages of three possible ways to induce countercyclical behavior It concludes that policymakers should impose countercyclical capital requirements and create an insurance system funded with riskbased premiums to insure the companies' bonds It further concludes that even with these measures occasional government bailouts may be necessary to stimulate lending during severe economic downturns
Recommended Citation
Julie A. Hill,
Bailouts and Credit Cycles: Fannie, Freddie, and the Farm Credit System,
2010
Wis. L. Rev.
1
(2010).
Available at:
https://scholarship.law.ua.edu/fac_articles/148