Posted by
voice_of_reason on Friday, November 28, 2008 12:44:30 PM
I believe it was Ayn Rand who likened Govt regulation to a 'penny in the fusebox'. While this may be a somewhat dated analogy in the modern context, it remains relevant.
Without the 'backing' of Fannie and Freddie, it is unlikely that the sub-prime, mortgage-backed-security contagion would have spread so far and wide. Investor fear (risk aversion, really) would've counteracted the desire for profit. This is the 'fuse' in Ayn Rand's fusebox analogy - the fear of losing money acts as a self-correcting mechanism.
But Fannie, Freddie and all their funny friends gave a measure of respectability to these investments, and the lure of easy money had a very strong appeal. With visions of a neverending shopping spree in their minds, investors kept on buying these dubious investments. The creation of Fannie, Freddie et al was the proverbial penny in the fusebox. Suddenly, an class of investments that belongs only among speculators, is given a stamp of respectability, or even a sense of false safety. No wonder that such instruments were picked up by pension funds world-wide.
For those who were around in the '80s, this has a sort of deja vu feel to it! The backing of FDIC and FSLIC led to the creation of irresponsible banks, which made foolish investments. Not surprisingly, this begat the S&L crisis.
In a similar fashion, Govt Sponsored Enterprises like Fannie & Freddie gave moral sanction to irresponsible investment and banking practices.
What is shocking is that the proposed solutions almost always include MORE of the same. When Govt agencies look for causal relationships that created this problem, is it any surprise that they don't direct the finger of blame at themselves?
The specter of Senators and Congressmen sitting in judgement over the mistakes of 'others' is just awful. However, what is most sickening is the fact that a majority of Americans seem to buy into the story line.