Gregory Mankiw

The issue of GSE reform goes well beyond the role of housing in the economy. It has far-reaching implications for the entire US financial system.

Most observers believe the GSEs pass some of their implicit subsidy along to homeowners through lower mortgage interest rates...This situation raises concerns over fairness, because the subsidy puts other financial institutions at a disadvantage, but the larger issue is that the subsidy creates a source of systemic risk for the US financial system. The risk arises because the subsidy has allowed the GSEs to become gigantic...

Because the housing GSEs are so large, the risk they face is important for the entire financial system...Even a small mistake in GSE risk management could have ripple effects throughout the economy.

The belief in a government bailout if things go wrong creates an incentive for a company to take on risk and enjoy the associated increase in return...Although there is no way to eliminate the underlying risk, it is possible to reduce it by ensuring that the housing GSEs are overseen by an effective regulator.