Wednesday, October 08, 2008

Lessons from the Bailout

The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans. They were forced to by the heavy hand of government. The solution is not a taxpayer-financed bailout. The solution is to let them fail and allow the people who invested in them, as well as the people who purchased homes they couldn't afford, suffer the losses. Of course that takes a level of political courage that is in short supply.

~George Mason economist Walter Williams

8 Comments:

At 10/08/2008 10:12 AM, Blogger Marko said...

When I first saw this quote, it looked like it was written by George Mason, and I thought "man, he really was a visionary!"

On the substance -- last night I heard the Obama bring up fairness. I wish McCain had said "Yes, fairness. How is it fair to make hardworking, successful people pay for the mistakes of greedy, stupid or lazy people? What is fair is to let the people that lent too much, or borrowed too much, suffer the consequences". Although looking at that, maybe it is better he didn't say that.

 
At 10/08/2008 10:55 AM, Anonymous qt said...

The lesson of this story is that the global financial network depends on confidence. The problems roiling the international markets go far beyond a minor percentage of U.S. mortgages gone wrong. Investors are now questioning the entire system.

What we are watching is similar to George Bailey in A Wonderful Life trying to explain to people that their money is not in the bank but invested in the community.

Perhaps, the investment community needs to step up to the plate like George Bailey putting his $2,000 on the line. Agreeing to $1.00 per year salaries like business leaders did during WWII would restore confidence that business leaders are willing to commit their resources for the betterment of our society.

When you hear about the million dollar payouts to execs at Lehman and AIG, the public are justifiably angry that the financial community enjoys the perks and walks during a crisis leaving taxpayers to pay the bill.

 
At 10/08/2008 12:57 PM, Anonymous Anonymous said...

The financial collapse of Fannie Mae and Freddie Mac is not a failure of the free market because lending institutions in a free market would not have taken on the high-risk loans.


It seems to me that plenty of lending institutions in the free market did take on similar high-risk loans. Between mortgage lenders and investment banks I can think of several companies who got into trouble by taking on bad loans. To the best of my knowledge, all of these firms worked within the private sector.

 
At 10/08/2008 1:06 PM, Anonymous Anonymous said...

Dear Marie Antoinette,

I would like to know whom among those against the bail out would be financially effected if pension funds, mutal funds etc etc all go down the drain.

There are many people who played no part in the irresponsibility that caused this crisis but who would be effected by economic collapse.

Tenured professors, senators, and people who are so wealthy that if their assets fell by half would still be rich have little risk of being hurt by the crisis.

However the average person who is trying to save for retirement is in a different situation. Letting those responsible off the hook is not a satisfactory solution, but letting the rest of us "eat cake" when there is no bread is not satisfactory either.

 
At 10/08/2008 2:33 PM, Anonymous qt said...

It seems to be premature to talk of lessons learned while the liquidity crisis is still unfolding.

The only problem with the bailout appears to be that the crisis has spiralled beyond mortgage backed securities into other types of investments ie. 62 trillion dollars worth of credit default swaps. Freddie, Fannie and the mortgage industry were only the match that lit the fuse.

Where this ends is anyone's guess but the impact will likely be severe. At present, my husband's investments & my RRSP are worth less than 1/2 what they were worth 1 year ago. It is highly unlikely that a global recession will be averted in spite of the best efforts of central bankers and the U.S. Treasury.

I guess we won't have to worry about greenhouse gas emissions once the global economy tanks.

 
At 10/08/2008 4:36 PM, Blogger juandos said...

qt says: "When you hear about the million dollar payouts to execs at Lehman and AIG, the public are justifiably angry that the financial community enjoys the perks and walks during a crisis leaving taxpayers to pay the bill"...

Hang on a second there qt, aren't those perks a function of what the board of directors and the stockholders did or didn't do?

Did any of the CEOs of these failing financial house actually go to Congress ask for bailout money?

This is NOT a rhetorical question, I just hadn't seen anything about it...

I didn't anyone other than the CEOs of the auto industry actually had asked...

anon @ 12:57 PM, you should've done a little more homework regarding the CRA...

Thomas J. DiLorenzo professor of economics at Loyola College in Maryland wrote: The thousands of mortgage defaults and foreclosures in the "subprime" housing market (i.e., mortgage holders with poor credit ratings) is the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers. The policy in question is the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in what the supporters of the Act call "communities of color" that they might not otherwise make based on purely economic criteria...

anon @ 1:06 PM says: "Letting those responsible off the hook is not a satisfactory solution, but letting the rest of us "eat cake" when there is no bread is not satisfactory either"...

You are talking about these people, right?

Bert Ely wrote the following in 1994: Lending mandates hurt most bank customers

By the end of this year, four banking regulatory agencies are expected to rule on a radical revision of the regulations under which the Community Reinvestment Act is enforced against America's banks and thrifts. This revision, if adopted substantially as proposed, will worsen the impact of a bad law, the fundamental premises of which are long overdue for thorough scrutiny.

A tougher CRA stick is not the way to bring more banking services to low-and moderate-income communities. Instead, Congress should utilize the carrot of marketplace incentives to permit banking to serve these communities, and all of America, better than ever will be possible under the CRA. This can be done by privatizing banking regulation and its attendant deposit-insurance risk through what is called the "cross-guarantee concept."

The CRA was enacted in 1977 to end banking's allegedly inadequate provision of banking services to low-and moderate-income communities. It is doubtful that this avoidance charge was ever proven sufficiently to justify that enactment. Worse, the debate ignored the extent to which then-existing banking regulations discouraged bankers from serving these communities.(there's more)

 
At 10/08/2008 10:50 PM, Blogger bobble said...

"One other thing I've done, is I've called on private sector mortgage banks and banks to be more aggressive about lending money to first-time home buyers. And the response has been really good. There's a lot of people in this -- our communities around the country that deeply care about the issue of homeownership, and they've been responsive."

- George W. Bush, U.S. President, March 26, 2004.

LOL, can we blame this all on bush now?

 
At 10/09/2008 1:48 PM, Anonymous Anonymous said...

From The Big Picture

Its important to understand how this situation occurred in the first place, if we want to be able to fix it. Blaming the CRA and Fannie/Freddie is a total misunderstanding of how the problem occurred, and what we need to do to fix it now, and avoid doing it again in the future.

To repeat my prior arguments, the proximate cause of the Housing crisis were 1) Ultra-low rates; and 2) Abdication of traditional lending standards, thanks to 3) originators ability to resell mortgages for securitization purposes, and hence, 4) not have to worry about loan defaults.

The credit crisis was caused by 1) the above securitized mortgage paper, that was 2) rated triple AAA by Moody's and Standard & Poors, which then 3) Which was then "insured" by credit default swaps (CDS) -- the unreserved for, shadow insurance products 4) whose exemption was made possible by the Commodities Futures Modernization Act. That legislation exempted these derivatives from any supervision or regulation. The lack of reserve requirements is why there is now $62 trillion in CDS, many of which will never pay their counter parties the promised insurance.

If you are going to blame Fannie/Freddie/CRA, or George Bush or Barney Frank, you are missing the big picture.

 

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