Kudlow's Corner

Should Private or Government Capital Bail Out Fannie and Freddie?

We asked our panel:

Should Private or Government Capital Bail Out Fannie and Freddie?



The Kudlow Caucus Breakdown

Stefan AbramsManaging Partner, Bryden-Abrams Investment Management
Ideally, the inevitable recapitalizations of Fannie and Freddie should be accomplished with private capital, but my own view is that the need will be so great that in the end each of us taxpayers will be “lucky” enough to be forced to participate.

Joe Battipaglia
Market Strategist, Stifel Nicolaus
Since the government has an implicit guarantee behind Fannie and Freddie, they’re the ones who should provide the bailout and should benefit by way of their equity stake if it’s recovered.

Jared Bernstein
Senior Economist, Economic Policy Institute
I’d rather private capital do it, but the fact is they’re TBTF (too big to fail), so the bail-out bucket brigade should be at-the-ready. BTW, the question we should be asking ourselves is how’d we get here in the first place. Answer: housing bubble. Solution: better oversight and management of mortgage markets. Moral: the time to worry about moral hazard is not the weekend when the bank is failing.

Jerry BowyerChief Economist, Benchmark Financial Network
How long must the failed policies of LBJ hang around the neck of this country? Johnson created Fannie and Freddie in the late 60s to pay for the Vietnam war and the creation of a giant welfare state. Both failed. It’s time to cut Fannie and Freddie off entirely. Instead of talking about giving them another umbilical cord into the body politic, we should be cutting the existing line of credit. Fannie and Freddie are a giant slush fund for the urban vote-buying sub-prime industrial complex and its congressional masters.

Vince FarrellScotsman Capital Management
Ideally private capital should be used. If the situation is as dire as the plunging stocks indicate there will be no time to line up private capital. If a bailout is required, the common shareholders should not be bailed out. The common should be wiped out. The debt has to be supported since so much of the mortgage structure is connected. A "reprivitization" should be undertaken as soon as possible.

Jim LaCampPortfolio Manager, Portfolio Focus, RBC Wealth Management
Co-Host, Opening Bell Radio Show, Biz Radio Network
It's time to allow all the handcuffed capital sitting on the sidelines to enter our broken financial system. Throw in a cap gains break for private equity to invest in the troubled banking and financial sectors and you solve a lot of the issues.

The problem is that these "Quasi-agencies", these "implied credits" have been allowed to run bad balance sheets, because of the implied backing. They desperately need capital, and private equity, oddly enough, would create better accountability here.

Art LafferFmr. Reagan Economic Advisor
Chief Investment Officer, Laffer Investments
I don’t know that they should be bailed out by anyone, but they certainly should not be bailed out by the public (government).

Donald L. Luskin Chief Investment Officer, Trend Macrolytics LLC
This is an impossible question for those who believe in free-markets, because Fannie and Freddie are both already monstrous hybrids of private and government capital. As publicly traded companies, they are ostensibly privately capitalized. Yet with strong implicit government guarantees, they are in fact ultimately capitalized by government. A little bit pregnant, to be sure.

But if you hold a gun to my head, then the marginal dollar should always be a private dollar. Long term, let’s see if we can get the government out of the deal entirely.

Steve MooreSr. Economics Writer, The Wall Street Journal Editorial Board
Government capital should not bail out Freddie and Fannie but the government will almost certainly step in to bail them out.

James Pethokoukis
Sr. Writer, U.S. News & World Report (Money & Business)
Private capital if they can get. If am deepy worried that we are on the verge of a bailout binge (Fannie, Freddie, homewoners, GM, etc.) not seen since the Great Depression, with maybe some nationalizations tossed in. Big Government, Big Spending, Big Regulation = Big Trouble.

Robert Reich
Former Labor Secretary
Professor of Public Policy, UC Berkeley
Fannie and Freddie's investors should bear the costs, but as a practical matter they won't. Fannie's and Freddie's loans are assumed to be guaranteed by the government even though technically and legally they aren't, and investors will demand that government bail them out. Congress will cave.

Gary Shilling
A. Gary Shilling & Co. President
I think that’s unlikely without an explicit or implicit guarantee from the government very much as Fannie and Freddie already have.