Mortgage Crisis: Where Do You Draw The Line?
September 16th, 2008 categories: About the Local Market, Assessing the Local Market
Every day, we’re hearing scary news about the mortgage crisis and the never ending list of big corporation’s seeking the government’s bailout/protection. Really, there is nothing new under the sun. Listen to the lineup of past bailouts according to the article,
Mortgage crisis has Washington putting aside free-market ideology, International Herald Tribune, September 7, 2008
“The effort to save Fannie Mae and Freddie Mac is only the latest in a series of financial maneuvers by the government that stretch back to the rescue of the military contractor Lockheed Aircraft and the Penn Central Railroad under President Richard Nixon, the shoring up of Chrysler in the waning days of the Carter administration and the salvage of the U.S. savings and loan system in the late 1980s.
More recently, after airplanes were grounded because of the terrorist attacks of Sept. 11, 2001, Congress approved $15 billion in subsidies and loan guarantees to the faltering airlines.
Now, with the U.S. government preparing to save Fannie and Freddie only six months after the Federal Reserve Board orchestrated the rescue of Bear Stearns, it appears that the mortgage crisis has forced the government to once again shove ideology aside and get into the bailout business.”
Nouriel Roubini of NYU’s Stern School, gives a stearn caution about this type of ideology though:
“What they (the federal government) did with Bear Stearns was borderline illegal as Paul Voelker said. The moral hazard is becoming worse and worse. After nationalizing Fannie and Freddie, do they add GM and Ford the airlines anybody other the sun, GMAC. You name it won’t ask for money from the government? What are we going to nationalize the entire economy?
We are the biggest market economy in the world. We’re going to turn into a socialist economy? This is what we are doing step by step. So, at some point they have to draw the line.” Nouriel Roubini, NYU’s Stern School, Roundtable discussion, Sunday, September 14, 2008.
With that in mind, one must wonder why the Government should bail any of these institutions out any way? Listen to the “why” according to former Fed Chair, Alan Greenspan:
“To the extent that bailouts, which are the use of federal funds, draws on our scarse savings supply, you undermine the growth of the economy and ultimately if it is on a wide scale basis, you get stagnation and economic stagnation is a very dangerous thing for a democratic society.
There are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investment in an economy that, on very rare situations, and this is one of them, it is desirable to prevent them from liquidating in a sharply disruptive manor, because that is assistance to the economy as a whole.” Alan Greenspan, ABC “This Week”, September 14, 2008
Here’s a list of this year’s major fallouts. You be the judge as to whether the Fed should intervene in order to provide “assistance to the economy as a whole” or whether it is a step toward “nationalizing the economy”:
Fannie Mae and Freddie Mac, a private organization, was placed into a conservatorship of the Federal Housing Finance Agency on September 7, 2008. According to Wikipedia, as of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) own or guarantee about half of the U.S.’s $12 trillion mortgage market.
Bear Stearns was one of the largest global investment banks and securities trading and brokerage firms prior to its collapse in 2008. It was one of the first to fall in the sub-prime lending crisis. The Federal government intervened in order to prevent the potential market crash that would result from Bear Stearns becoming insolvent. Ultimately it was sold to JP Morgan Chase at a deeply discounted rate. The Federal Reserve agreed to issue a non-recourse loan to JP Morgan Chase, thereby assuming the risk of Bear Stearn’s less liquid assets. Later, Security and Exchange Commission Chairman Christopher Cox said the collapse of Bear Stearns “was due to a lack of confidence, not a lack of capital.” Many have questioned the Fed’s role in this intervention.
Yesterday, Lehman Brothers, a global financial services firm, a primary dealer in the U.S. treasury securities market, filed for bankruptcy September 15, 2008, the largest in U.S. history.
Today, AIG, one of the largest international insurance and financial services a organizations in the world, with operations in more than 130 countries and jurisdictions. The government is expected to announce an $85 billion bailout of the huge insurer in a bid to avoid further market upheaval.
It’s a hard balance and when will it end? Comments welcome.
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