Let Fannie and Freddie Fail?
Not everybody thinks the government needed to step in and essentially take over Fannie Mae and Freddie Mac. Banking guru Martin Weiss thinks the financial situation at the two mortgage giants is far worse than many realize. That, combined with a worsening economy, will doom Uncle Sam's efforts, he says. "Just to keep Fannie and Freddie solvent will take so much capital, there will be no funds available to pursue the primary mission of this bailout—to pump money into the mortgage market and save it from collapse," Weiss says. "That mission will ultimately end in failure."
Weiss, in the analysis I link to above, outlines what he thinks Treasury Secretary Henry Paulson should be saying to Bush right about now:
Let's say I'm a foreign investor and I own U.S. Treasury bonds. This implies that I trust the U.S. government; that I loaned you my money for the purpose of running your government. Now you take my money and pass it on to a third party, a private company. So I say to you, "What did you go and do that for? If I wanted to loan the money to that company, I would have done so myself—directly—in the first place. But I didn't. I didn't do it because I don't trust the company. I trusted you. But now I can't trust you anymore either. Now you're just one of them." So the investor stops buying our bonds or, worse, dumps the government bonds he's holding, and then we are in trouble. Then we can't sell our government bonds anymore to pay off the old ones coming due. Then we, the United States government, default.
Another antibailout guy is George Mason University economist Bryan Caplan. At the EconLog blog, he writes:
My own view: As usual, Herbert Spencer got it right: "The ultimate result of shielding men from the effects of folly, is to fill the world with fools." The U.S. has just missed a golden opportunity to credibly signal to the world for decades to come that "no guarantee" means "no guarantee." I've previously argued that economists underrate the death penalty because they aren't factoring in availability bias. I think they're underrating a "Just say no to bail-outs" policy for the same reason.
Tags: Fannie Mae | Freddie Mac | government intervention
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Reader Comments
Freddie and Fannie
Did they bring in the right people to turn this boat around? Not so sure they did.
Who do you trust?
Out of the question, but those of us that remember WWII days were happy that we did not owe our future to Japan, China, Saudi Arabia or anybody else.
We remember that Americans financed that war with War bonds, Savings bonds, Victory bonds.
We didn't emerge from that one owing anybody but ourselves!
Even school children bought savings stamps and glued them into the stamp books until filled and then they were converted into $18.75 bonds that paid $25 at maturity.
Parents bought higher denomination bonds when they could afford to and Americans owned their own government.
Jimmy Carter urged a program of energy bonds patterned after the above in his July 15, 1978 televised speech (google it) as a way for Americans to help finance our way out of today's addiction to oil.
Common sense ideas do not stand a chance against big money interests.
Democratic Congress to the Rescue?
Unfortunately a Democratic Congress and a Republican President signed this free money backed by the American taxpayers bailout to the tune of 5 trillion. Fannie and Freddie were only 50% of the secondary market, let the other 50% of the market decide what to do, not the government. Republicans use to be for less government fortunately McCain wants to make sure that [the two companies] are permanently restructured and downsized and no longer use taxpayer backing to serve lobbyists, management, boards and shareholders.
To have given the government a free hand to tax payer funds is a crime, there should be a Senate investigation on this stupidity! Unfortunately the idiots are running the asylum!
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