Fannie and Freddie Redux

In the opinion of Sen. Gregg (R) N.H., the Senate version of the financial reform bill “is a disaster because it doesn’t address the fundamental underlining causes of the economic issue, which were real estate and underwriting. “ The focus in the drafting of this legislation “was directed at scoring political points.”

Two things are horribly wrong with the Senate bill which was drafted primarily by Sen. Dodd. First, the bill creates a giant new government authority with the propagandic title “Consumer Protection Agency”. Its provisions center, not around protection, but around ordering banks to lend “on social justice purposes instead of safety and soundness purposes.” In other words the new rules would be a form of affirmative action for banks to lend to borrowers of questionable ability to repay, all in the name of social justice.

The current financial crisis, the one that Rahm Emmanuel urged Democrats not to waste, was the natural consequence of large scale lending to borrowers who could not afford to repay. A high level of sub-prime lending was mandated by HUD and facilitated by the Government Sponsored Entities (GSE) known as Fannie and Freddie with added help from Greenspan’s low interest rates. The federal government set up the conditions in the real estate market that led to its inevitable collapse. The Dodd bill just passed by the Senate would set up similar conditions in the consumer lending industry as it did in real estate.

The second problem with the bill is the unintended consequence of less regulation of derivative markets.  The prohibitions in the bill are likely to cause those markets to find a home overseas where restrictions are less onerous and out of reach by U.S. regulation. Such a response would be what economists call “rational expectations”.

Remember, social justice, to the left means equal status. To achieve social justice, wealth must be redistributed.

Bob B

Bookmark and Share

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s