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Government takeovers
Posted by: McQ on Monday, September 08, 2008

By now you've heard the news. Freddie Mac and Fannie Mae have been taken over by the government:
There is no guarantee that the takeover will work, and it comes at a potentially massive cost to taxpayers. The government has pledged to inject money in the companies in any quarter in which they would otherwise be insolvent — up to $100 billion in total for each company.

"This is a shareholder bailout financed by the U.S. taxpayers," said Armando Falcon Jr., formerly the chief regulator of Fannie Mae and Freddie Mac.
And therein lies the problem. Jon ably points out, at NextRight, how this grows government:
This is how government grows...

1. Socialize Risk: Government intervenes in an industry to "solve" some apparent and visible problem. This is done "for the people."

2. Unintended Consequences: This intervention merely shifts the costs to new areas and sweeps problems under the carpet, where they accumulate.

3. Blame The Market: Government intervention is not blamed, because the people who support it assume their good intentions could not be responsible for bad things.

4. Socialize Profit: The Left demands Something Be Done by people with Good Intentions. Politicians comply. This is done "for the people."
If you watch carefully, those 4 points will come to pass as government absorbs these quasi-governmental entities and blames 'the market' for their troubles and demise.

So how does this shake out politically? Again Jon:
Unfortunately, our political structure comes at this from four different places.

* Democratic politicians, organizations and activists are happy to go along with Steps 1-4, because, hey, #4 was their goal in the first place.
* Republican politicians and organizations go along with Steps 1-3, only objecting at Step #4. By which time it is too late.
* Business goes along with Step #1, and attempts to use Step #2 to get more of Step #1.
* Libertarians believe the problem occurs at Step #1. Once Step #1 is conceded, we've already lost on steps 2-4. But libertarians and limited government conservatives have relatively little power.

Now, we are at Step #4 - essentially nationalizing Freddie Mac and Fannie Mae. As Chris Bowers writes, "nationalizing industries ... is the literal definition of socialism and big government". Of course, he thinks that is a good thing, also writing that "nationaliz[ing] the mortgage industry ... actually seems like a good idea to me."
He's nailed it. And, as is obvious in this case, step 1 is done.

This is an increasingly disturbing pattern that rewards financial misconduct in the market by eliminating the penalties the market imposes. Thus the lessons of the market are side-stepped but not without cost. And of course, government grows yet again.

It also promotes more reliance on government:
Auto industry allies hope to secure up to $50 billion in government loans this month that would pay to modernize plants and help struggling car makers build more fuel-efficient vehicles.
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Previous Comments to this Post 

I’m not so sure this is as big a deal as Jon makes out. Look, gang, whatever else they are, Fannie and Fredie are NOT private enterprise. They are governmental entities, having been created by them. these are private concerns in name only.

Let me be clear, here; I’m not high on the idea of government growth either, but I’m unconvinced the growth we’re now complaining abotu didn’t happen when Fannie and Freddie were formed initially.

Written By: Bithead
Bithead, the problem is that they were keeping all the profits and paying exhorbitant salaries while making reckless decisions. They were able to privatize the illusory profits during good times, then when the bills came due, socialize the costs on the backs of taxpayers. That’s the problem, and it’s a huge one.

As horrific as this decision was for Joe Taxpayer, it will get worse. With govt in firm control, every fool who took a mortgage that he couldn’t afford will get whatever special terms (1% interest, deferred payments, etc.) that are needed to keep them in the house.. The govt will pay whatever it takes to keep them in their houses, all at taxpayer expense subsidizing it all. Folks who played by the rules, who saved their money for a 20% or more down payment and have been paying on their notes for years.. those are the very folks, along with countless other taxpayers who never shared in the profits of the bad decisions made by Fannie and Freddie, they are the ones who will end up subsidizing the reckless irresponsibility of both lenders and borrowers.
Written By: Darrell
URL: http://
Bithead, the problem is that they were keeping all the profits and paying exhorbitant salaries while making reckless decisions.
And in short, doing what only government has the power to do, if lastingf or long is at all on the agenda, agreed.

As for the rest, I doubt it’ll come to that. It’s my take this is a temporary takeover, as one would a bank. Even with that, however, we’re still left with the whole thing being a government operation from stem to stern, and that it’s that one factor that caused all the trouble in the first place.


Written By: Bithead
Socializing loss and privatizing profit is better?

When thinking about policy issues like this one I sometimes find it helpful to frame them as debate propositions. So, for example, in this case:

Resolved: That promoting liquidity in the lending market by means of a GSE has worse economic consequences than allowing illiquidity under a purely market system.

After all that’s the reason that Fannie Mae was created: to ensure that loans continued to be made when the purely private market wasn’t making loans at all.
Written By: Dave Schuler
After all that’s the reason that Fannie Mae was created: to ensure that loans continued to be made when the purely private market wasn’t making loans at all.
And that’s ended up being vastly better, hasn’t it?
Written By: McQ
It is indeed a disturbing trend...and one that is only beginning. When Big Ben said he would ’crank up the printing presses’ to avoid deflation he was dead serious. But illiqudity is already present and getting worse (see the TED spread.)

This is nothing more than a coordinated Federal effort to pump the $$$ supply (via credit) but it will have continued disastrous ’unintended consequences’. In fact, according to Bloomberg the chain reaction has already begun: $1.4 Trillion of GSE Credit Default Swaps Triggered by Bailout. Can anyone say Whackage is Forthcoming?
Written By: Unscripted Thoughts
URL: http://
And that’s ended up being vastly better, hasn’t it?
A nice parallel to the point I’ve been making, now, isn’t it?

All that said, I dunno... I guess that given the specific conditions presented, there’s not much else the current bunch could do.The response of government in such a situation seems to be limited to exactly what happened. And apparently, the world markets seem bouyed by the news, if I read the tickers correctly. Then again, they’ve never been consdiered with longer term implications, anyway, particularly political ones.

Written By: Bithead
Resolved: That promoting liquidity in the lending market by means of a GSE has worse economic consequences than allowing illiquidity under a purely market system.
I like the way you think. It is a good exercise to frame issues as debate propositions, although I have a quibble with the way you framed your proposition using the word "illiquidity" under a purely market system, as the market system will always be liquid if interest rates and other terms make the risk/reward attractive.

As for me, I believe that promoting liquidity through government intervention results in worse economic outcomes than through a purely free market system, because reckless decisions are insulated from the consequences of those bad decisions as a result of govt intervention. If you subsidize, reward, and/or insulate the consequences of bad decisions through govt intervention, that will surely result in more bad decisions in those areas which are being subsidized and protected by govt.
Written By: Darrell
URL: http://
The only even slightly viable reason for the taxpayers to lend money to automakers is because it’s the lawmakers who are hammering them with CAFE regulations. Tell the automakers to buzz off and at the same time, eliminate the entire CAFE scam. Let the market tell the automakers what people are willing to buy.
Written By: TheOldMan
URL: http://
I cannot help but be amused when I consider that both Fannie and Freddie were run by oh-so-qualified economists and business titans with graduate degrees from elite institutions while some have denigrated Gov. Palin by calling her education second-rate, from a backwater school.
Written By: timactual
URL: http://
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Written By: 4

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