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 government-sponsored
enterprises. Yet the future of these companies post-bailout 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 pro-cyclically with business and credit
cycles. By repeatedly providing bailouts, however, government officials
demonstrate that they want these government-sponsored 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 risk-based
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.
