2008 Woodie Awards
Government allows irresponsible decisions
DYLAN DUKE GINTZ
ARBITER JOURNALIST
Issue date: 10/9/08 Section: Opinion
|
“During the Clinton Administration, deregulation of the financial markets started to happen,” Stano said. “During the Bush years you had government lobbyists and corrupt CEOs and CFOs, that weren’t willing to follow the basic guidelines of what is right and wrong and fleece America.”
The corruption and greed that Stano observes are manifestly true, but I disagree with the idea that deregulation is the main cause of the current loan fiasco. This financial mess was not created by private enterprise, but by government interference in the market. While Stano rightly observes how corporations corrupt Washington, I would agree that the government corrupting business was a stronger force.
To start with, the government created Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp.) in 1938 and 1970 respectively. The federal government formed a partnership with Freddie and Fannie to help poor people get loans. According to the Financial Times Online and the CATO institute, Freddie and Fannie did not give loans directly, but they bought mortgages and used them to create securities. These securities were bought incrementally as the underlying mortgages were paid off. This encouraged banks to make more high-risk loans than they normally would. Fannie, Freddie and their supporters justified their government support by presenting themselves as champions of minorities and the poor.
A study by the Indian Institute of Management finished in August 2005 found that “Agents tend to be significantly less risk averse when they make decisions over another person’s money, compared to decisions that they make over their own money.”
With all due respect to the institute and their researchers, well duh. It just makes sense that people insulated from the consequences of their actions make poorer decisions. Persons who have to endure the consequences are much more careful about their choices.
This lesson brings us to Freddie Mac and Fannie Mae. Unlike private companies, Fannie and Freddie have been GSEs (Government Sponsored Enterprise) since 1968. If they went under, it was presumed (accurately) the Federal Government would bail them out. That belief made banks lend recklessly since they could be protected if their investments turned bad. In a truly private market, bankers wouldn’t trust much of their money to folks with a lot of bad credit and very little money.
Freddie and Fannie were also powerful special interests in Washington. They effectively played both sides and made sure the right politicians looked the other way when they conducted poor investments.
It’s probably a good idea for the government to regulate home lenders to the extent that they actually know the monetary value of what they have. However, this current financial crisis owes more to government meddling than laissez faire capitalism. If we are going to have a Fannie and Freddie, the government should regulate them better. It would have been better not to interfere with the market in the first place. Incompetence and greed festered in the private market because government encouraged those qualities on behalf of the “underprivileged.”
Be the first to comment on this story