Tuesday, September 23, 2008

Fannie/Freddie Fiasco

The current situation with a potential government bailout of Fannie Mae/Freddie Mac is a classic example of why government should be more limited. These two entities were described as "quasi-governmental". There is no such thing. Anytime the government is involved and there is a problem, it becomes 100% governmental, and this is a perfect example of that. The US government had absolutely no business in the first place supporting entities that made such risky investments.

Under their original charters, Fannie and Freddie were intended to promote home ownership through the facilitation and support of a market for conventional, conforming, fixed rate loans. If they had stuck to this mission, there would be no melt down or liquidity problem in the market today. The problem was created because the government and members of a certain political party (begins with D), allowed these entities to go way off the reservation in promoting and investing in wacky subprime (read substandard!) loans to people who had absolutely no business borrowing money in the first place.

Now, of course, the government has to step in to fix their own mistake. Free market conservatives should hate the idea of a bailout, unfortunately the idea of a market meltdown is not a pretty prospect either. It is an ugly, ugly situation with no good solution. The lesson that should be learned, but probably won't be, is that government should limit itself to doing the few things that it does very well and stay out of creating or manipulating financial markets.

1 comment:

Kristin said...

Follow the money. Where did it all go? Mortgage companies made easy cheap loans to people that should not have qualified for any loan because they could never repay them. In turn those folks used the money to buy houses and to hire contractors to build houses, which in turn stimulated the economy. The Gov't supported this - growth at all costs. Seven years later the well ran dry.

The subprime debacle has been the largest economic stimulus plan in history. 700 Billion and counting.