Well, it depends on when you ask:
Joseph Stiglitz, Jonathan Orszag and Peter Orszag, Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard (March 2002), at 5, 6:
[O]n the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero. . .Joseph Stiglitz in the December 2007 Vanity Fair:
This analysis shows that, based on historical data, the probability of a shock as severe as embodied in the riskbased capital standard is substantially less than one in 500,000 -- and may be smaller than one in three million. Given the low probability of the stress test shock occurring, and assuming that Fannie Mae and Freddie Mac hold sufficient capital to withstand that shock, the exposure of the government to the risk that the GSEs will become insolvent appears quite low.
Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small -- even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million.
Bush’s own fiscal irresponsibility fostered irresponsibility in everyone else. Credit was shoveled out the door, and subprime mortgages were made available to anyone this side of life support. Credit-card debt mounted to a whopping $900 billion by the summer of 2007. "Qualified at birth" became the drunken slogan of the Bush era. American households took advantage of the low interest rates, signed up for new mortgages with "teaser" initial rates, and went to town on the proceeds.Joseph Stiglitz in the July 24, 2008, Financial Times:
All of this spending made the economy look better for a while; the president could (and did) boast about the economic statistics. But the consequences for many families would become apparent within a few years, when interest rates rose and mortgages proved impossible to repay.
The US government is about to embark on another example of such a [private/public] partnership, in which the private sector takes the profits and the public sector bears the risk. The proposed bail-out of Fannie Mae and Freddie Mac entails the socialisation of risk -- with all the long-term adverse implications for moral hazard -- from an administration supposedly committed to free-market principles. . .Guess that's what Democrats mean by "change."
We should not be worried about shareholders losing their investments. In earlier years, they were amply rewarded. The management remuneration packages that they approved were designed to encourage excessive risk-taking. They got what they asked for. Nor should we be worried about creditors losing their money. Their lack of supervision fuelled the housing bubble and we are now all paying the price. We should worry about whether there is a supply of liquidity to the housing market, so that those who wish to buy a home can get a loan. This proposal provides the necessary liquidity.
A basic law of economics holds that there is no such thing as a free lunch. Those in the financial market have had a sumptuous feast and the administration is now asking the taxpayer to pick up a part of the tab.
(via The Corner, twice, Peter Wallison)