The continuing and historic string of bail-outs (and they are just that) continue. First it was an investment bank and now the cornerstones of the American mortgage market. As a small government guy I chafe under the continuing government involvement but I agree with the actions so far: these institutions have to be unwound gradually and not with a bang. The future for both Fannie and Freddie should involve a tombstone. The time for centralized market makers in the mortgage industry is long since passed. These institutions need to be broken up and sold off. It cannot happen immediately but within the next several years as it is imperative that the government get out of that business.
Of course, the real bums who are largely responsible for this entire mess are the regulators who should have had an eye on the throttle and the banks who made such insane loans in the first place. I’m not a banking genius but it was becoming clear about 3-4 years ago that lending standards were falling precipitously and it was a question of when, not if, the problems would start. I remember being bewildered when a lady I know well enough to know she couldn’t afford it bought her second $500k house. This was so different from my experience buying my house 15 years ago that I knew it wasn’t good.
So, the real question is how much public money goes to offset losses incurred by reckless gambling with the mortgage market in order to preserve the orderly unwinding of that mess? I don’t know what that number is but I do know that it is near at hand. Capitalism has a downside and those that take stupid risks must feel the sting of the downside by losing it all.
September 14, 2008 at 9:11 pm
Sure, some folks are wondering where the regulators were now that things have gone bad; But when things were good many (certainly not all) of those same folks were telling regulators to keep their hands off and let the free market work. Wall street is terrific about insisting on laissez-faire policies except when they need help. Here’s the general rule: The American public ends up paying either way.
Same with the folks who used to work at Enron. When Enron was riding high and their 401ks were pumped up, they fought SEC scrutiny of Enron at every turn, but they sure wanted the SEC and DOJ to help them went Enron went south.
It’s true of course that in a free market there are winners and losers. But we need to remember that the losers are not confined to the direct players. The losers can include the entire economy. When that happens there are no bystanders.
Let’s hope this works out…
September 15, 2008 at 7:12 am
I agreed with you up to the last sentance Andy. The ones that cause these messes almost ALWAYS get away with it or suffer very little. How many 401k’s had millions in F&F? How many retirement plans took a hit with Bear Stearns collapse? Who will be hurt when Lehman goes down? I’m generally a “little govt” guy too, but this crisis we are heading in to (I think it will get worse before it gets better) just begs one to ask “who was asleep at the switch”???
September 15, 2008 at 10:56 am
I do fault the regulators. On items like this the gov’t (regulator) is supposed to take the long view. Pressure or no, they should have done their job or resigned. Now that it is clear they didn’t do their job, the administration should clean house by terminating the lot of them. I would point out that this isn’t an occurrence without precedent or some dim memory from the past. We had an asset bubble of smaller magnitude in 2000-1 that ended the same way. There was no mystery as to what was going to happen.
David, you make a good point and I agree that the bulk of the exposure goes to the general public but where should the gov’t stop when it comes to backing 2nd or 3rd order investments?
September 15, 2008 at 12:59 pm
Andy,
I couldn’t agree with your comments more. Fannie and Freddie should be broken up. Alan Greenspan warned of these days 4 years ago, and he was all but ignored.
Anytime the taxpayers are left holding the bag, there needs to be in vestigations…big ones. The Fed spent a ton of time and resources going after Enron and WorldCom, and it was willing investors who got screwed. People went to jail. In the Fannie/Freddie debacle, it is the unwilling taxpayer who funds the bail-out.
September 15, 2008 at 1:26 pm
I just saw Sec. Paulson speaking about Lehman Bros., Bank of America, Merrill Lynch and the rest of the financial meltdown that is going on at this moment. He is calling for move strict regulation in the financial markets. “Free markets” sound great, but when greed on Wall Street is the first order of business, someone needs to be looking over their shoulders in order to protect the average investor.
September 16, 2008 at 2:01 pm
I’ve always associated “small government” with less economic regulation. This looks to me like the result of 8 years of “small government”. I’d love to see a change.