On Fannie Mae and Freddie Mac…

Since most everyone has offered their opinions which are spread throughout the Internet, I am going to put some quotes and articles up here and comment on them. I hope this presents the biggest financial government intervention in a long time and sums it all up for you. If nothing else, it can serve as a reference.

The Wall Street Journal on this:

“Mr. Paulson’s weekend announcement represented one of the most sweeping interventions in financial markets since the Depression, essentially putting the government in charge of helping finance American mortgages. Fannie and Freddie are vital cogs in the housing market, backing three-quarters of all mortgages being made in the U.S. now that bruised Wall Street banks have withdrawn from that market. They hold or back more than $5 trillion in mortgage debt. But as the housing market cratered, investors grew nervous about the companies’ capital positions and their ability to weather the storm.”

This will obviously create a dependency problem. You must learn that the oven is hot and will burn your hand before you learn not to stick your hand in there. Sometimes you just have to get burned, but the government will not allow that. What happened to the kid in our society who is never disciplined?

The Guardian on this:

“Paulson said shareholders, who will be left with only a small share in the business, will be expected to absorb any further losses before the taxpayer becomes liable. He added that all voting rights would switch to the government and 80% of the common stock “on a fully diluted basis at a nominal price”. Analysts said the combined effect of these policies would in effect wipe out the value of any existing shares in the lenders.”

This article actually uses the word nationalization, this word seems to be avoided by American media and Paulson himself. With a move as big as this, it is hard to say the taxpayer will not pay some of this.

The International Herald on Paulson’s Bazooka:

“But the real question is, did things have to end this way? The answer, many on Wall Street believe, is probably not. Or at least not when they did.

Many people in financial circles can’t quite figure out why Paulson pulled the trigger when he did. He insisted politics had nothing to do with it. Never mind that the news broke just after the Democratic and Republican conventions, but as far away as possible from the November election.”

Interesting argument if we had to even do this at all. My answer is of course no.

Bryan Caplan on the legality:

“Could someone who knows the law explain the legal basis for the Treasury’s takeover announcement? The Wall Street Journal simply describes it as a “seizure.” But the last time I checked, the legal procedure for the U.S. government taking stuff was more complicated than just saying, “Now it’s mine.”

I think this raises an interesting point. Could the Supreme Court cut this down? I think/hope so, but I know it will never happen.

Last, but not least, to give you another Economist’s view. This is from someone who is usually in the middle, Greg Mankiw on this:

“I am saddened whenever any private profit-seeking enterprise gets bailed out, whether it is Chrysler, Long-term Capital Management, Bear Stearns, or the GSEs. Such bailouts sow the seeds of the next financial crisis by fostering expectations of future bailouts and encouraging excessive risk-taking. (And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are. In a capitalist system, you want those extending both debt and equity finance to bear the consequences of the risks they undertake. If the taxpayer is chipping in, someone is being insulated from risk.)”

Here are my final comments on this whole ordeal. Congratulations if you made it this far. I think it is important to remember where this problem came from. I have argued before that it was the recession of 2001 that caused the Fed to lower the interest rate. This pushed investment to other things like housing and when the natural rate adjusted, it all came down. This is the classic Austrian Business Cycle.

What I would also like to add is to remember that most of the time when we see a problem the media and the government frame it in the past few years. The problem is much bigger. There has been regulation forever.

Like Robert Murphy in Freeman Magazine once said, some would believe that this is the same as the police moving cars out of the way after an accident. But this is more like the police shooting at traffic and causing the accident and then making all the cars stop while they rush the bankers to the hospital.



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