Tuesday, September 16, 2008

They Miss It Every Time

Yesterday the Dow fell by 500 points. Large financial firms are having problems, some are in crisis. The root of the problem is a 2.5% foreclosure rate on housing--sounds small.

Both major presidential candidates are screaming "regulate!" I'm sure that government regulators know more about risk than those whose jobs depend on managing risk well.

Why did all those firms make so many risky loans? The Federal Reserve lowered interest rates in 2001 and kept them low for a long time. At one time a key interest rate for banks was 0%. With incredibly low interest rates, taking on lots of high-risk mortgages was profitable. When the market was glutted a year ago the Federal Reserve started cutting interest rates again--which is what started the problem.

In particular, Fannie Mae and Freddy Mac are in crisis. These are two government-created entities that have been shielded from oversight by politicians--Barney Frank and Charles Schumer being Fan/Fred's greatest champions. Because everyone knew Fan/Fred's debt holders would be paid by the government if the "companies" defaulted, they were able to pay lower rates and expand their debt to approximately the size of the U. S. publically held debt.

The Wall Street Journal began blowing the whistle on Fan/Fred in 2001. The Journal kept up the drumbeat and politicans kept pushing back until Fan/Fred could no longer claim that they were solid.

So we have a financial problem/crisis that was caused by government--Fed/Fan/Fred. And both candidates are recommending more government bureaucracy in order to fix things. They will never learn.

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