Calculated Bunk July 11, 2008 at 6:34 pm

Calculated Risk has a post on Fannie and Freddie that defies belief. Commenting on the suggestion that the US government should bail out the agencies without screwing the stock holders – for instance by buying new sub debt to provide liquidity – they say:

If this blog’s comment threads are any kind of representation of a slice of reality–I am often agnostic on that question, but still–there are more than a few people who are more interested in getting a front-row ticket to a morality play than working through a financial crisis with the least (further) damage to the banking system. Lord knows that a lot of bad policy can be floated along under the guise of “pragmatism,” but I for one would rather try debating with a pragmatist than a purist or a moralist.

Two words Tanta – moral hazard. It is vital that any government support of the agencies is at the cost of the equity owners. To do anything else isn’t pragmatism, it is the grossest and least defensible public subsidy of the providers of risk capital. By all means let the US government support the Agencies if it judges that to be in the national interest. But do it in such a way that those who were perfectly happy with the rewards of Fannie and Freddie’s absurdly high leverage also bear the consequences of it. Capitalism is a broad church but it does not include privatised gain and socialised loss.

Spire

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