If you know your Murray Edelman, then you know that politics is a game in which insiders divide up the goodies while giving the broader public symbolic reassurance. That framework can be used for housing finance.

In housing finance, the goodies can be described as privatized profits with socialized risks. With mortgage securities, private firms reaped the profits and taxpayers took the risks.

For the past thirty years, these goodies were divided between Wall Street on the one hand and Freddie Mac and Fannie Mae on the other. The Nocera-McLean book, All the Devils are Here, captures the flavor of the jockeying between them.

Wall Street now sees an opportunity to cut Freddie and Fannie out of the deal. The preferred Wall Street reform sticks with the concept of privatized profits and socialized risks, but without having to fight for the goodies with the entity that provides the guarantee. Hence, proposals like the one in the Obama Administration report that calls for a government “backstop,”

Incidentally, the more I think about it, the more outraged I am by the sketchiness of their proposal. It takes up only a few paragraphs, and those are quite vague. It is the sort of thing that, if somebody tossed it out at a meeting or in a blog post, you would say, “Might be interesting, but I am not quite sure how you would do it. Do you have a background paper on it somewhere?” In the form that it is presented in the report, I think that it is irresponsible to even call it a proposal. Shame on Treasury for putting something so half-baked at the center of their report.

This puts me in the strange position of defending Freddie and Fannie. My first choice would be for government not to hand out any goodies. But if you are going to have the government hand out goodies, the ability of regulators to control the costs and mitigate the risks will be much greater if we revert to Freddie and Fannie than if we try something new. Under any arrangement, the hard part will be what I call “staying off the booze,” meaning keeping the government from guaranteeing riskier mortgages (second mortgages, cash-out refis, loans on investment properties, loans with low down payments, etc.) when house prices start rising again.