The government has played an important role in the American housing market since the early 1930s, when the Great Depression ushered in housing programs to promote a stable society. The government's role expanded further during the recent housing and financial crisis—Fannie Mae and Freddie Mac now dominate the American housing market, backing more than 62 percent of new mortgages and holding more than $5 trillion in accumulated mortgage risk.
In The Future of Housing Finance Martin Baily and his associates discuss the issues and options that policymakers face as they reassess the government's role in the U.S. residential mortgage market. While presenting diverse analytical perspectives, including a contribution from former chairman of the Federal Reserve Alan Greenspan, all contributors agree that the government's support for mortgage financing in the recent past was too broad and deep but some role is necessary to maintain the stability of the housing finance market. The Obama administration has recommended reducing the role of Fannie and Freddie while replacing them with a private market approach, but continuing federal support for worthy borrowers. But what will Congress agree to? And how fast will it move on any initiative?
Specific topics include:
• Introduction of a new system to reduce incentives that encourage excessive risk taking.
• Gradual withdrawal of Fannie and Freddie from the housing finance system.
• New approaches to regulating mortgage securitization, with financial stability as a primary goal.
• Use of government-backed guarantees through institutional structures designed to limit moral hazard.
Martin Neil Baily is the Bernard L. Schwartz Chair in Economic Policy Development and a senior fellow and the director of the Initiative on Business and Public Policy in the Economic Studies program at the Brookings Institution. He was chairman of the Council of Economic Advisers during the Clinton administration (1999–2001) and one of three members of the council from 1994 to 1996.
Financial Restructuring to Sustain Recovery maintains that while each part of the financial services industry can play a useful role in revving up the U.S. economic engine to full capacity, the necessary reforms are sometimes subtle and often difficult to implement. Editors Martin Neil Baily, Richard Herring, and Yuta Seki and their coauthors break recovery down by three areas:
Restructuring the housing finance market
Reforming the bankruptcy process
Reenergizing the market for initial public offerings
Included are lessons drawn from Japan's experience in overcoming its long-lasting financial crisis after the collapse of its real estate market in the 1990s.
Contributors: Franklin Allen (Wharton School, University of Pennsylvania), James R. Barth (Auburn University College of Business; Milken Institute), Thomas Jackson (Simon School of Business, University of Rochester), Jay R. Ritter (Warrington College of Business, University of Florida), David Skeel (University of Pennsylvania Law School), and Glenn Yago (Milken Institute).
Baily and Chakrabarti provide a comprehensive assessment of U.S. technology policy and its importance to growth. They argue for continued support of basic science, even though strength in this area does not give the U.S. economy an immediate competitive advantage, and advocate increased support for "middle ground" and commercial research. They conclude that this support must be structured to preserve the advantages of the market.