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Federal Use of Implied Guarantees: Some Preliminary Lessons from the Current Financial Distress

Marvin Phaup
Public Administration Review
Vol. 69, No. 4 (Jul. - Aug., 2009), pp. 651-659
Published by: Wiley on behalf of the American Society for Public Administration
Stable URL: http://www.jstor.org/stable/27697911
Page Count: 9
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Federal Use of Implied Guarantees: Some Preliminary Lessons from the Current Financial Distress
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Abstract

The U.S. financial crisis and recession that began in 2007 poses profound challenges for public policy and administration. It also provides useful information about the effects of economic policies. This paper considers the implications of current developments for the use of implied guarantees as an instrument for the use of implied guarantees as an instrument of public policy. It draws on experience with Fannie Mae and Freddie Mac to argue that implied federal guarantees have a severe disadvantage. Their costs are largely unmeasured, unrecognized in the budget, and unmanaged. Yet their use appears to be increasing in the current crisis. To minimize the costs of the expanded financial safety net, government should measure and manage those costs more effectively. To that end, this paper proposes new budgetary treatments of federal implied guarantees.

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