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GM Joins Fannie and Freddie

The opportunity to pursue private profits backstopped by an implicit government guarantee is an invitation to take on excessive risk.

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While the projected losses from the U.S. bailout of GM are small by comparison, it’s hard to ignore that the reconstituted GM increasingly looks like the newest member of the “government sponsored enterprise” club, which means, in effect, that it is also “too big to fail.” Fannie and Freddie morphed into behemoths that profited from their special relationship with the government – and then left taxpayers holding the bag when things went sour.  Now, GM is pulling out their old playbook to increase sales using an in-house subprime lender. Unsustainable revenue growth in anticipation of an initial public offering (IPO) is not likely to be in the long-term interests of taxpayers. 

Until the U.S. government takes its finger off the scale for these two sectors, there can’t be a meaningful recalibration of capital and resources across the economy. This recalibration is a key part of the country’s ability to break out of its slow-to-no growth trajectory. How to enable the development of new and sustainable patterns of investment and consumption within the economy is the central challenge for policymakers moving forward. 

Christopher Papagianis is the managing director of Economics21.  He was previously a special assistant for Domestic Policy to President George W. Bush, working on both housing and transportation policy.

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