aaron evans

So much of what I read about the “housing crisis” indicates that the problem is rooted in the “marketization” of the mortgage industry. Mortgages were turned securities that were then traded in a market where the underlying risk of the securities was hidden. In this explanation, the problem is that the free market ran amok: aggressive sales people sold poor saps mortgages they couldn’t afford and the market hid the underlying risk of those mortgages until defaults began.

This is all true but hides the role of the federal government in creating this problem. The federal government has kept interest rates artificially low since 2001 and this factor played a large role in inflating the real estate bubble. The free market is not solely to blame: it was propped up by the Federal Reserve. It appears that the Fed has played a large role in creating this mess and they are now struggling to clean it up. I have doubts that they’ll be successful.

The Fed intervened during the collapse of Bear Stearns. It’s not clear what caused the run on Bear Stearns but when it happened, the Fed stepped in to rescue the company (at a great loss to Stearns shareholders). The concern was that if Bear Stearns would fall, others would follow. I generally agreed with this action as many economist’s statements indicated that panic was spreading and could bring down more securities firms.

Now, we come to the collapse of Fannie Mae and Freddie Mac; a case where the government’s role in the ‘industry’ has been disastrous. The government may have temporarily saved the two companies, but it’s clear that the current system of government subsidized mortgage companies should not continue to exist the way it does now.

Today, I heard Jim Rodgers reaction to the Fed intervention:

I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, 65, said in an interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.

I agree. The Fed’s interventionist ways cannot continue; something’s got to give. Who’s next? Washington Mutual, Lehman, or Citigroup, or something else?

This entry was posted on Sunday, July 13th, 2008 at 11:32 pm and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.