Joseph Lee's Perspectives
My view of the world
September 9, 2008--Another Government Bailout - Fannie Mae and Freddie Mac

                Over the week-end, the Treasury announced the bailout of yet two more financial giants, Fannie Mae and Freddie Mac.  Now the debate moves on to “what are we going to do about these institutions?”    Generally, there are three camps—those who favor trimming them and making them look like public utilities, some Democrats who want the two mortgage giants to be restored to its original health and the let loose with new controls to prevent a similar fiasco, and the Bushies who want these two companies to be dissolved and let the private sector take over (see NY Times).

                These are important decisions, and another reflection of how smart people can disagree on the appropriate course of action depending on their political and economic leanings.   The stupidity of it all is that the ultimate decision is not an economic decision, but one of public policy.   There is no such thing as a free market economy, nor is there a state controlled one.  We live in a world where we go back and forth between regulation and market forces (many of which are political in nature).

                Few free marketers today will argue that regulations to mandate occupational safety or equal pay for equal work or severe penalties for insider trading should be repealed.   And few socially-inclined activists would suggest closing down the NYSE, or putting a price cap on gas prices (as Nixon did), or having the government nationalize the oil companies.   We live in the margins, and the arguments are necessarily “marginal” at best.  We do not have revolutionary ideas that would give us solutions that work every time under every scenario. 

                Would a Democratic administration have been able to avoid the huge bailouts?  Probably not.  Although it is true that Bush’s War took liquidity out of the markets, it is also true that the housing bubble was not sustainable. 

                Perhaps the biggest lesson to learn is that the market adapts, people adapt, and we flex and bend, and when everything is about to burst at the seams, we find a solution that stinks, but it’s better than not doing anything at all.  In a sense, things worked out, perhaps not the way we want it to, but nonetheless, it worked.

                And that’s what matters.

                And then the Democrats and the Republicans and the economists and the capitalists will all go at it again to argue whose fault it was, so that they would find a solution that will appeal the most to their intellect, but more importantly, to their constituencies. 

                Till the next bailout.  It’s an endless cycle.

2008-09-09 15:27:25 GMT
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