Today’s government-sponsored enterprises (GSEs), including Fannie Mae, Freddie Mac and the Federal Home Loan Banks, have perpetual charters. This is a mistake. History teaches an essential lesson: GSEs, if they are created at all, should always have limited-life charters and never be granted perpetual ones.

GSE charters grant them privileges and confer upon their shareholders enormous economic benefits. As 19th century US President Andrew Jackson wrote, “Every monopoly and all exclusive privileges are granted at the expense of the public.” These privileges should not be granted forever.

A charter that expires and requires reauthorization gives society a chance to reconsider whether the grant of special privileges is still warranted. Every GSE creates contingent liabilities for taxpayers. Do the taxpayers think the GSE is still worth it? Every GSE represents some kind of arrangement with the government. Maybe the respective benefits and costs have become skewed and need to be restructured. A limited-life charter gives the government a chance to cut a new deal.

GSEs often grow in unintended ways, developing political and economic power, reaping monopoly (or duopoly) profits, and creating market distortions. Limited-life charters put reformers in a much stronger position as the expiration date approaches.

Consider the substantial difficulty involved in moving legislation to reform the regulation of Fannie Mae and Freddie Mac. In spite of the opportunity presented by their acutely embarrassing accounting scandals involving many billions of dollars and the missteps which caused both of their top managements to be forced out, legislative action may end up stalemated.

Think how different the situation would be if Fannie and Freddie, following the American historical tradition, had been given twenty-year charters. Fannie’s current charter dates from 1968. Assuming it had been renewed in 1988, it would have expired again in 2008. Freddie’s current charter dates from 1989, so would be expiring in 2009.

If these GSEs were contemplating charter expiration and potential automatic privatization in just three or four years — a heartbeat in historical time — the negotiations over GSE regulation reform would have an altogether different tone, and the chance to enact meaningful reform would be greatly enhanced.

Each GSE is created in the particular circumstances of some historical moment, with the GSE as an answer — real or perceived — to specific economic and political issues of the time. Such was the case for the Federal Home Loan Banks (FHLBs) in 1932, for Fannie Mae in 1938, and for Freddie Mac in 1970.

None of the circumstances which prompted the creation of America’s current GSEs still exist. The assumptions behind their charters have changed beyond all recognition. None of the problems to which GSEs were considered solutions were permanent problems — and none warranted a perpetual charter.

The better choice, limited life-charter, has some notable historical examples.

The First Bank of the United States, America’s first GSE, was chartered in 1791. It was given a twenty-year charter. Its subsequent history clearly shows the power of a limited-life charter to force reconsideration of a GSE. When the charter expired in 1811, Congress voted not to renew it, and the first American GSE simply closed down.

Congress created the next GSE, the Second Bank of the United States, in 1816. The charter lasted for twenty years, expiring in 1836.

The dispute over whether this charter should be renewed is known as the famous “Bank War” between Andrew Jackson and Nicholas Biddle, president of the bank. Congress passed an act to recharter the Bank in 1832. Jackson vetoed it, accompanying his veto with a message of striking intellectual clarity and rhetorical vigor, which stands as a timeless critique of GSEs. Jackson observed: 

• The powers, privileges and favors bestowed in the original charter operate as a gratuity to the stockholders.
  
• If the government sell monopolies and exclusive privileges, then they should at least exact for them as much as they are worth in the open market.
  
• Admit that the bank ought to be perpetual, and as a consequence the present stockholders will be established as a privileged order, clothed both with great political power and enjoying immense pecuniary advantages from their connection with the government.

Jackson’s veto stood. In 1836 the Second Bank of the United States ceased to exist as a GSE and became a private sector bank. Jackson’s principles were unfortunately forgotten, but the GSE reform legislation now being considered by Congress presents an opportunity to redress the mistake of perpetual charters. Congress should give Fannie Mae, Freddie Mac, and the Federal Home Loan Banks limited-life charters. Having re-established this essential principle, Congress should then extend it to all other existing GSEs, such as the Farm Credit Banks, and to any GSEs that may be created in the future.

In short, no GSE should ever have a permanent charter. 

Alex J. Pollock is a resident fellow at AEI.