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Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million. <br><br>

Given the extremely small probability of default by the GSEs, the expected monetary costs of exposure to GSE insolvency are relatively small — even given very large levels of outstanding GSE debt and assuming that the government would bear the costs of all GSE debt in the case of insolvency. For example, if the probability of the stress test conditions occurring is less than one in 500,000, and if the GSEs hold sufficient capital to withstand the stress test, the implication is that the expected cost to the government of providing an explicit government guarantee on $1 trillion in GSE debt is just $2 million. <br><br>

...In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financial institutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other large institutions in the past....<ref>[http://www.pierrelemieux.org/stiglitzrisk.pdf Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard,] by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. Fannie Mae Papers, Volume 1, Issue 2, March 2002. </ref>}}

...In the absence of Fannie Mae and Freddie Mac, mortgage risk would likely be held by large banks and other types of financial institutions, which themselves benefit from the perception that they are “too big to fail.” Fannie Mae and Freddie Mac are among the largest financial institutions in the country. Even in the absence of a GSE charter it is likely that they would continue to benefit from their size, since the government has intervened on behalf of other large institutions in the past....<ref>[http://www.pierrelemieux.org/stiglitzrisk.pdf Implications of the New Fannie Mae and Freddie Mac Risk-based Capital Standard,] by Joseph E. Stiglitz, Jonathan M. Orszag and Peter R. Orszag. Fannie Mae Papers, Volume 1, Issue 2, March 2002, Conclusion p.6. </ref>}}

Stiglitz was awarded the [[Nobel Prize]] in [[Economics]] for 2001. When Fannie Mae went insolvent in 2008, throwing the planet into deep economic upheaval for the better part of the next decade, Fannie Mae removed the paper from its website.<ref>[http://econlog.econlib.org/archives/2009/11/stiglitz_and_or.html Stiglitz and Orszags on Fannie Mae,] David Henderson, November 9, 2009. econlog.econlib.org </ref> And shortly after Peter Orszag was proven disastrously in error with his prediction of 1 in a half million chance of a Fannie Mae meltdown, President [[Barack Obama]] appointed Orszag to manage the U.S. government's finances as Director of the Office of Management and Budget.

Stiglitz was awarded the [[Nobel Prize]] in [[Economics]] for 2001. When Fannie Mae went insolvent in 2008, throwing the planet into deep economic upheaval for the better part of the next decade, Fannie Mae removed the paper from its website.<ref>[http://econlog.econlib.org/archives/2009/11/stiglitz_and_or.html Stiglitz and Orszags on Fannie Mae,] David Henderson, November 9, 2009. econlog.econlib.org </ref> And shortly after Peter Orszag was proven disastrously in error with his prediction of 1 in a half million chance of a Fannie Mae meltdown, President [[Barack Obama]] appointed Orszag to manage the U.S. government's finances as Director of the Office of Management and Budget.