Joseph Lee's Perspectives
My view of the world
July 14, 2008--FANNIE MAE, FREDDIE MAC, INDY MAC and the Free Market

                On Friday, the federal government took over IndyMac (NY Times), resulting in the second largest failure in US banking history.   There are complicated issues at stake, many of them related to the economics of the mortgage lending business, a good portion having to do with the business model of IndyMac (which did a huge amount of Alt-A loans to people with less than stellar credit history), and some not far off from the politics of the day where the Democrats and Administration officials are seeing who is more to blame for the mess.

                Any attempt to predict the future and/or to analyze this complex problem will fall short in a blog. 

                I am a proud graduate of the University of Chicago’s Graduate School of Business, although I’m currently an Adjunct Professor at the Drucker School.  This means that I am basically an advocate of free markets, and see more danger in government interference than not.

                In the 1990's, when the Japanese bubble burst and the government intervened, I had a chance to participate in a panel of experts to discuss how best to deal with the crisis.   There was a brief video of how the Japanese government was taking steps necessary to help consumers by directing bank operations via various edicts.  When it was my turn to comment, I made a statement, “How is it that a problem created by massive government regulation should be solved by the same people who created it?  And why is it that the government continues to believe that it is the best outfit to fix things, rather than letting the free market reign, and letting the bad banks fail?”

                An individual representing the government shook his head in amazement, and retorted, face turning red, “I simply cannot accept such comments at a physiological level,” expressing his dismay with capitalism.

                In 1981, I took a class from an accounting professor at Chicago who told me that this argument about whether free market or governmental action is better is nonsense.  It is not about whether government intervention is good or bad, he told me.  It is about social decisions where the circle of decision makers and participants can only act when a critical mass is reached.   We cannot expect a private company to put parks, roads, sewage, cable lines, and other infrastructure for society.  Nor can we expect them to declare war.   Government, whether local, state, or federal--once again defined by the circle of influence-- must take the leadership role, although the actual solution may be  a private one.

                The downfall of FANNIE MAE and FREDDIE MAC will have far reaching impact beyond the business world (Washington Post).  Necessarily, this is a political decision.  And how we view the appropriateness of government action probably has far less to do with the correctness of such action, but much more with how we see the role of government (and the market economy) to begin with.

                Simply put, it all depends on our perspective.

2008-07-14 17:56:44 GMT
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