Proving the rule

The US government will step in to ensure that Fannie and Freddie will not fail. Paul Krugman argues that this is appropriate because they were a symptom not a cause of the current financial crisis.

So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works. …Still, isn’t it shocking that taxpayers may end up having to rescue these institutions? Not really. We’re going through a major financial crisis — and such crises almost always end with some kind of taxpayer bailout for the banking system.

And let’s be clear: Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.

They are in trouble because of the housing bubble. That was the thing that shouldn’t have been allowed to occur in the US. This is the lesson that the ‘let’s leave it to the markets’ crowd need to take away from all this.

One thought on “Proving the rule”

  1. If the money from loans from Freddie and Fanny were restricted to housing what would happen? In other words if I sell a house to someone who pays all or part with a Freddie loan and that loan money I receive has to be spent on another dwelling then what will be the effect? I believe it will lower the value of the money I receive but only if it is to be used for another purpose. In effect this will prick the housing asset bubble but restrict the fall to the housing market.

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