Fannie/Freddie to recieve access to unlimited credit line for three years

May 29, 2009
225
0
USA
#4
What we have seen is the ugly face of deregulation. The subprime mortgage meltdown and collapse of the financial markets was the fault of deregulation. If the FDIC, FSLIC, HUD and FTC had done a proper job of regulating the banks and mortgage lenders, and if the SEC had exercised proper oversight of the sale of these mortgage-backed securities, we wouldn?t be in this mess. The government had no choice but to pick up the tab; and we will all be paying for it for a long, long time to come.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#5
What we have seen is the ugly face of deregulation. The subprime mortgage meltdown and collapse of the financial markets was the fault of deregulation. If the FDIC, FSLIC, HUD and FTC had done a proper job of regulating the banks and mortgage lenders, and if the SEC had exercised proper oversight of the sale of these mortgage-backed securities, we wouldn?t be in this mess. The government had no choice but to pick up the tab; and we will all be paying for it for a long, long time to come.
The reason the government had to pick up the tab is because they assumed the risk for the banks on the mortgage investments. This was not a result of deregulation- it was more due to the moral hazard the government created. If the FDIC, Fannie/Freddie, the Fed, etc. had not existed, these companies would not have been bailed out and perhaps more importantly, they would not have acted so irresponsibility because they would have no insurance on losses. The government provided that insurance and with that paved the way for bad decisions. You can say that more regulation would've solved it, but not only would more regulation mean a less free society, a larger tax burden, and distorted markets, but would also likely create a moral hazard somewhere in the system. A more deregulated market would have allowed for sustainable market growth, while not holding the risk of moral hazards.
 
May 29, 2009
225
0
USA
#6
No, it was deregulation. The banks, mortgage lenders and investment brokers lobbied for it, and got Congress to go along with it. Now the problem is how to go about instituting regulation in the current financial debacle. The problem can be easily solved with a single piece of legislation. All that need be done is for Congress to repeal the provisions of title 11 that exempt financial derivative contracts from bankruptcy. (Derivatives are really secret liens that conceal leveraged borrowing carried ?off balance sheet? - this was the lesson learned from the Lehman Brothers bankruptcy, and why AIG was ?too big to fail? necessitating the government ?bail-out.?) Without that exemption for ?anonymous creditors? the market will be forced to regulate itself. It?s really that simple.
 

myp

Site Founder
Jan 14, 2009
5,841
50
#7
No, it was deregulation. The banks, mortgage lenders and investment brokers lobbied for it, and got Congress to go along with it. Now the problem is how to go about instituting regulation in the current financial debacle.
Sure there was some deregulation, but the reason the banks lobbied for it was because of the moral hazard it created due to other market interference that already existed in government. It was really the unsafe middle ground where we found ourselves that created this mess. Now, you can argue that we should have had more regulation, but that would only stall markets and create more distortions. Even before deregulation such as with Glass-Steagall, the existing regulation had been enlarging and pumping up bubbles as is evident by the boom-bust cycle that grew in intensity since the late 1920s. What I am saying is we should go the other direction and rid of as much regulation as we can, in which case if a company makes a bad decision and goes under, then so be it. Bankruptcy and the market will always evolve to meet demand and any assets held by the company that aren't toxic would quickly be sold off to investors (and even toxic assets could be sold to long-term investors.)

The problem can be easily solved with a single piece of legislation. All that need be done is for Congress to repeal the provisions of title 11 that exempt financial derivative contracts from bankruptcy. (Derivatives are really secret liens that conceal leveraged borrowing carried ?off balance sheet? - this was the lesson learned from the Lehman Brothers bankruptcy, and why AIG was ?too big to fail? necessitating the government ?bail-out.?) Without that exemption for ?anonymous creditors? the market will be forced to regulate itself. It?s really that simple.
But, it still isn't that simple :p Such legislation would still leave room for drastic over-leveraging due to the Fed's monetary policies and irresponsible behavior due to GSEs and government programs that assume risk for private firms.
 

deanhills

Secretary of State
Mar 15, 2009
2,187
2
#8
The Treasury has extended a capless credit line for three years to Fannie Mae and Freddie Mac, the large government-sponsored mortgage giants. The news was delivered after the markets closed today.

Story from Reuters: http://www.reuters.com/article/idUSTRE5BN2ZI20091224

Talk about a moral hazard. Thoughts?
Will this bail-out come from the same 1.2-trillion kitty that bailed out the BIG banks, or where do you think the Federal Government intends to source this funding from?
 

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