Home > News and politics > How I came around to accepting the financial bailout

How I came around to accepting the financial bailout

Through a series of acts, in 2008 the U.S. Federal Government bailed out the financial industry (and threw in the American auto industry for kicks and giggles). One of the major motivations for this was that if the entire industry were to collapse it would be an unmitigated disaster for every part of the American economy. While I understood that it would be bad, I still didn’t like it. The free market capitalist in me loves survival of the fittest and feels that any company that can’t survive deserves to fail. The strong and healthy companies will rise from the ashes and we as a society will be better for it.

That desire though only works if other certain assumptions are true. One of those assumptions is that the market has well thought out rules and regulations. The American mortgage industry does not. The American mortgage industry has a very aberrant aspect to it, and that’s Fannie and Freddie. I understand that a free market will benefit society the most when it has proper rules and regulations. Without rules, a market will collapse and deteriorate into either a medieval fiefdom system, or a banditry system. Rules and regulations in a market system are like scaffolding and the individual contributors build healthy societies around that scaffolding. If the scaffolding is weak, the whole system falls apart. The best an individual player in the market can do is build a pyramid out of their own rocks; no one works together. My desire is for there to be a strong scaffolding, resulting in a healthy, stable, and “tall” society.

If Fannie and Freddie are the cause of commercial collapse then shouldn’t the solution be that the smart financial companies don’t deal with them, and then they will survive the next crisis and eventually Fannie and Freddie will go away? The problem is that since the government created Fannie and Freddie, that’s not going to happen. It’s the government who creates the rules of the market, and with Fannie and Freddie (or any future Fannie and Freddie like groups) they’re part of the rules of the market. The result is an unhealthy, unsustainable market; a scaffolding with a weak point. The reason why they’re such a blight to a healthy system is because they play by different rules. I’m not familiar with all of the details, but an example would be if the financial rules were that all banks needed to keep %6 of the value of their loans in cash at all times, Fannie and Freddie would only need to keep %3. So what we have is a well thought out market which was put into place (by the Congress and financial regulators), and then Fannie and Freddie were given exceptions to all of the rules. This makes them more profitable; but only in the short term, they don’t operate in a sustainable way.

Because of the size, exceptional rules, and mandate of Fannie and Freddie it would be unreasonable to expect the other financial companies to ignore them. It’s too difficult to ask a company not to take advantage of the opportunity to make money by selling assets to Fannie and Freddie. The reason is because it can work, for one, two, five, ten, twenty years. The rules Fannie and Freddie play by, are passable, for about fifty to sixty years. Then it comes falling apart, and because they’re so big (with the government supplied starting capital) they bring the whole system down with them. It’s unreasonable to ask a company to do profitable business for fifty years, and then hope that they magically know there’s going to be a collapse soon so they should stop doing those things. The rules of the post 1930’s market seem to have been well thought out, and the only reason why we’re in trouble today is because of exceptions, given to certain entities, from those rules.

The reason why the government had the responsibility to bail the financial sector out is because the government caused the weakness in the market that the other players in the market couldn’t avoid.

Categories: News and politics
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