After rumors over the weekend, the US Government confirmed it's intention to under-write the bonds issued by Freddie Mac and Fanny Mae potentially costing the US tax-payers billions of dollars.
Is this a good thing? and could it have been prevented?
My own view is that it cannot be a good thing to bail out greedy lending houses that made some catastrophic mistakes in the lending market, and in general any intervention by Government is likely to tip the delicate balance of the economy. In fact it is this propensity to 'tinker' with the economy that has accentuated the current financial crisis.
The market economy naturally experiences peaks and troughs, yet both UK and US treasuries seem obsessed with staving off an inevitable recession, as if playing with interest rates and handing out a few more benefits was going to make a real difference against the irresistible force of the free market economy.
Could it be with elections looming on either side of the Atlantic that this futile action and misuse of public money was a political ploy?
The blame culture we have courted seems to have misled collective Governments into thinking that they may actually be to blame, and if this is the case, they can take action to 'rectify' a recession.
Wrong on both counts, the treasury has a passing and slight effect on the economy as a whole and is neither to blame nor should be expected to be able to 'fix' it. The market is a beast which cannot be tamed or controlled - it is fickle and once it has made up it's mind, it does what it pleases.
Desperate actions however are required in a scenario where 9% of US homeowners are failing to meet mortgage payments. The two big mortgage companies Freddie and Fanny have been losing money hand over fist, billions per month and whilst they claimed to have the reserves to cover their losses, the writing is definitely on the wall for these two financial giants.
In writing a blank check (cheque) to keep the companies solvent, the Government is exposing the tax payers to a huge financial committment, and all the questions that surrounded the Northern Rock debacle in the UK are now been asked in Washington - the main one being Why are we bailing out a commercial enterprise that has gone wrong?
2 comments:
Jay - how would you sort this mess out?
Honestly I don't have an answer, my complaint is that we are in a free market and yet the Government is prepared to throw billions at bucking the market, it seems futile to me. Fair enough some people are gaining a degree of protection which is great for them... It sickens me that money which could be used to improve healthcare could be earmarked for the kind of social housing which we spent billions getting out of in the Thatcher years. I'm old-fashioned I hate to see wasted cash...
I notice the Nationwide are coming round to my way of thinking in declaring there could be a 25% house price drop by 2010. I am still holding out for 50% by 2012...
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