Normal financial-services firms should have been dealing in the safe, middle-of-the road mortgages that Fannie and Freddie specialise in. Except that they were crowded out into subprime mortgages. Fannie and Freddie should never have grown so large. Except that they wanted to exploit the margin between the government-guaranteed borrowing costs and the commercial lending income. They should have been stopped by Congress and their regulator. Except that they spent some of their subsidy on a fierce lobbying machine.It's a vicious circle: the subsidies enrich an interest group, enabling it to resist anything that threatens its power to enrich itself further. We see it in other sectors: agriculture, fisheries and corporate welfare generally, and there's very little transparency about it. Ordinary people don't vote for subsidies to the wealthy (and that often accelerate destruction of the environment), but that's where quite a significant proportion of consumer and taxpayer subsidies go. (In the current draft of my book I estimate perverse subsidies to amount to about 7 or 8 percent of all the world governments' spending.)
Governments and their corporate beneficiaries can keep this nonsense going because we are used to accepting as reasonable the specification of policy goals in terms of vague promises, are so turned off by the arcane business of policy making, with its emphasis on legalisms, spending plans, institutional structures and process, process, process.
A Social Policy Bond regime would be different. Outcomes would be explicit and transparent. They'd be meaningful to voters and they'd be costed. If the goal is, for instance, to help poor people buy their own homes, then that would be targeted, rather than some alleged means of bringing that about. Bonds would be issued that rise in value once the number of poor people helped to buy their homes had risen beyound a specified level for a stipulated period. There'd be no ambiguity, and no substitution of corporate goals for voters' wishes.