Paulson: Fannie & Freddie Should Be Replaced to Avoid Another Economic Collapse

Treasury Secretary Henry Paulson urged Wednesday that mortgage giants Fannie Mae and Freddie Mac be replaced with a system that either explicitly backs certain mortgage loans with government credit, or leaves housing to the market, according to a report by RTTNews. "Government support needs to be either explicit or non-existent, and structured to resolve the conflict between public and private purposes," Paulson said. "Any middle ground is a recipe for another crisis."

Because they were chartered by Congress, these companies are known as Government Sponsored Entities, or GSEs. Paulson acknowledged that the structure of Fannie Mae and Freddie Mac is a politically charged issue, with Republicans blaming high-ranking Democrats for supporting the companies in an attempt to extend homeownership in the country--while at the same time being stock holders in the GSEs.

"The inherent conflict in this structure is obvious - the GSEs served both a public mission and private shareholders - they received public support but operated for private shareholder gain," Paulson said.

But the treasury secretary noted how difficult it was before the financial crisis, which forced the government takeover of Fannie and Freddie, for lawmakers to change the structure of the companies.

"The GSE reform debate was largely frozen in place, or moving at glacial speed," Paulson said. "Then suddenly, the unprecedented housing correction shifted the ground under that debate and forced action."

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