Liberty MavenGovernment Bailout of Fannie and Freddie Could Bankrupt Us
July 16th, 2008 2:46 pm | by Mike Miller | Published in Activism, Banking, Big Government, Debt, DownsizeDC.org, Economics, Federal Reserve, Liberty, Money, national debt, Politics, Taxes | 1
D o w n s i z e r – D i s p a t c h
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Quote of the Day: “The bigger they are the harder they fall.”
– conventional wisdom
Subject: How things get too big to fail, and what to do about it
When the politicians created Fannie Mae and Freddie Mac they claimed that these institutions would provide stability to the housing market. But neither the housing market nor Fannie and Freddie are stable. Instead, Fannie and Freddie have brought us fear, risk, and uncertainty to the tune of $5.3 trillion.
Only the monopoly we call the federal government has the power to create a $5.3 TRILLION risk.
In a true free market the business of secondary mortgages would’ve been handled by hundreds or thousands of competing entities. It would’ve been very unlikely that all these firms would have made the same mistakes at the same time. But our government created a situation where the secondary mortgage business is dominated by just two institutions, Fannie and Freddie, so that any mistakes these two firms make have the potential to harm everyone.
Combine this with a centralized money supply and centralized interest rates set by the Fed, as well as centralized rule making concentrated in Congress and the bureaucracy, and conditions are ripe for disaster.
Even in what’s left of the free market economy government contracts and preferential policies help create businesses that are too big to fail. And so we constantly find ourselves at the mercy of the decisions of a small group of people running huge institutions that concentrate, rather than diversify, risk. Just a few mistakes by a few of these individuals can cause a cascade of disasters.
Things become too big to fail because the federal government makes them that way. Failures follow naturally from the concentration of decision making. Government bailouts immunize these “too big” institutions from the consequences of their decisions, thereby encouraging risky behavior. There’s even a name for this phenomenon — “moral hazard.” Big mistakes with big consequences become very likely.
Who pays for all these mistakes? You do. Your savings will be damaged or destroyed, through losses and inflation. As a taxpayer, you’ll foot the bill for bailouts that primarily benefit the people who made the mistakes.
What can we do about this? We must decentralize our economy by Downsizing DC. This will take time, but it must be done. What do we do in the short term? We must start by telling Congress what we want.
We may, at some point, have a campaign directed at Fannie Mae and Freddie Mac. In the meantime, the proposed bailout of these monstrosities is going to increase the national debt and make it harder to deal with the future unfunded liabilities for Social Security and Medicare. For now, we can use our campaign on that subject to tell Congress what we think.
Use your personal comments to object to the bailout of Fannie Mae and Freddie Mac. Remind Congress that it will increase the national debt. Tell Congress to downsize government involvement in banking, thereby reducing future risk from ventures that are “too big to fail.” You can send your message here.
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Perry Willis
Communications Director
DownsizeDC.org, Inc.
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July 16th, 2008 at 6:11 pm (#)
I’m flabbergasted by the idea of a limitless credit line for Fannie Mae and Freddie Mac. Let’s follow the line of thinking here and see if it makes sense.
I think I’ll go to my bank, tell them that I’ve made some pretty terrible financial decisions and ask for a platinum credit card and a blank check loan! I’d probably get laughed out of the bank or have the mental sanitation squad called on me. What? What works for Wall Street doesn’t work for me? It shouldn’t work for anyone.
But this deal is, as Hank Paulsen put it, to assuage investors. I love hearing about how the plan is to “Reassure Investors”, which is doublespeak for “Remove Risk”, which sounds a whole lot like what economists refer to as “Creating Moral Hazard”.
In my opinion, a major contributor to the current crisis was the regulation following the Savings and Loan crisis. Part of the action taken was the securitization of debt, your mortgage backed securities, which essentially ensured that any fallout in the mortgage industry would be disbursed throughout the rest of the economy. They were trying to limit risk by spreading it out, distributing the share of the burden. I guess you could say the burden is indeed being shared.
This sort of behavior does not avert disaster, it only delays it and exacerbates it. These type of bailouts incentive risky behavior on the part of investors, stockholders and corporations who begin to believe they can always count on a taxpayer bailout. It’s time to cut the strings.