Wednesday, September 17, 2008

Are Fannie and Freddie Too Big to Fail? (Frank Shostak)

Frank Shostak uses Austrian Economics to describe why the bailout of Fannie and Freddie is such a terrible idea:

On Sunday, September 7, 2008, the US government seized control of mortgage finance companies Fannie Mae and Freddie Mac. According to the government's statement, the financial health of both Fannie and Freddie (FF) had deteriorated to such an extent that it could have posed a serious threat to the US economy.

Congress established the FF in order to provide support for the housing market by keeping money flowing in the mortgage market. (Fannie Mae was established in 1938 as part of Franklin Delano Roosevelt's New Deal; Freddie Mac was established in 1970.)

The FF market share of all new mortgages reached over 80% early this year. From this one can infer that a deterioration in FF financial health, which undermines their ability to keep the flow of money going to the mortgage market, is likely to hurt the housing market and the economy. Hence most experts have concluded that the seizure of the FF by the government was a responsible act, one which could restart the flow of money to the mortgage market, reviving the housing market and in turn the rest of the economy.

Read the rest to find out why these "experts" are wrong!

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