Posted by
Andrews on Wednesday, September 24, 2008 11:42:03 AM
With estimates for the cost of the proposed Fannie Mae bailout approaching a trillion dollars, I am starting to hear doom sayers coming out of the woodwork, decrying the irreparable harm of such a bailout. While I am hardly a fan of bailouts, having argued that the government has no role in business, either to penalize or benefit the participants, I do have to argue that such predictions of doom are excessive.
Does no one recall the hand wringing over the savings and loan bailout? It was predicted at the time that for decades the economy would be in a slump, that vital government services would go unfunded, that we would be struck by ever increasing poverty. Yet, here we are less than thirty years later, immeasurably richer that we were prior to the disastrous bailout. Now, that doesn't make it a good idea, we would have been richer still had we not paid for the bailout, but it was hardly the disaster predicted. Thanks to a combination of economic growth and monetary inflation, the bailout was hardly as onerous as was predicted. Yes, it did increase the national debt, but no more than many other projects.
And the savings and loan bailout did have one beneficial consequence, it largely killed off the idea of the savings and loan. It made it clear that a savings bank tied largely to inflexible, long term credit instruments such as mortgages is just asking for disaster. After the savings and loan collapse no one in Washington was pitching either the revival of the FSLIC or the savings and loan industry in general. It was a costly lesson, but at least it was a lesson that finally got the attention of Washington.
Hopefully, the equally costly Fannie Mae bailout will teach a similar less and make Washington wary of "encouraging home ownership" as well as providing guarantees for mortgages. Perhaps it will even cause some to start questioning the economic sense behind such quasi-governmental private businesses as Fannie Mae. Such enterprises tend to be nothing more than a license for political cronies to print money, financed by risky investments, with their losses being borne by the general public. As there are already allegations of mismanagement, I am hoping that the government finally learns its lesson about these government "partnerships" with private enterprise.
Then again, I think the savings and loan bailout may have been a fluke. The fact that we learned our lesson there was a once in a lifetime event, and I fear we will learn nothing form the subprime market's collapse. Let's face it, forcing private business to shoulder the burden of risky loans to bad credit risks is an easy way to buy votes among the poor, and when the collapse comes, the businessmen themselves make an easy scapegoat, especially when they foreclose on those same homes. So, sadly, I doubt we have seen the last of the bad ideas which brought about the collapse of Fannie Mae.