The Problem With Hybrids

THE PROBLEM WITH HYBRIDS….Fannie Mae and Freddie Mac were examples of institutions known as Government Sponsored Entities, or GSEs. That is, they were neither fish nor fowl, neither fully private nor fully public. Larry Summers writes today that this was a big part of their problem:

When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were “private companies.” But market discipline was nearly nonexistent given the general perception — now validated — that their debt was government backed. Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.

….It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.

Is Summers being too skeptical? Is this a general problem, or were Freddie and Fannie one-off failures that were inevitable in a meltdown as spectacular as our recent mortgage bubble/bust? Discuss.

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