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Saturday, April 24, 2010
Not sovereign debt, but safe debt?
Earlier this month Timmothy Geithner (from this Wall Street Journal Blog) suggested that while Fannie Mae and Freddie Mac's debts are not one in the same with America's sovereign debt they are supported (perhaps even guaranteed) by the U.S. Government. "Geithner...said debt from the two government-sponsored enterprises isn’t the same as U.S. Treasury's, but that support for the two firms 'is crucial in helping to stabilize the housing market and the overall economy.'" This is a very similar situation to the current advantageous position of the major financial firms. With the government's backing secured, investors or loaners are confident that Fannie and Freddie are great--almost "risk free"--bets. As a result, the mortgage firms can act in whatever manner maximizes profit without regard for risk or consequences. Even worse, unlike the banks Geithner has said, "'the Administration will take care not to pursue policies or reforms in a way that would threaten to disrupt the function or liquidity of these securities or the ability of the GSEs to honor their obligations.'" In other words, the White House understands the problems with these firms but isn't prepared to do anything about it. To me, that is very very disheartening. According to the Wall Street Journal blog post mortgage reform is a lower priority than financial reform and if that legislation is anything like health care it could be months in coming.
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ReplyDeleteI think it is always risky business for the government to become too involved in the private market. As we have seen in the recent economic crisis if the company begins to fail than the whole economy suffers. I hope the Obama administration changes their attitude and creates reform that is the best interest of the American people and a sound economy instead of worrying about big business.
ReplyDeleteI think Geithner is a little off base on this one. If the government guarantees a debt, it does implicitly have the same risk as the government. I agree with Chloe in the sense that government intervention dramatically shifts the risk / reward payoff.
ReplyDeleteI agree with Chloe on this one. We need to think about how we can help those economies really struggling out there (small communities as well as large) and although on a State level it is very important to have solid policies/funding we need heavy reform.
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