Restating the Obvious

Small enough to fail

There's been a great deal of confused discussion about Fannie Mae and Freddie Mac among people who discuss these things. (And, side question, why are they always so smug?) It boils down to, one one hand, let market discipline work and watch them fail if they are going to fail; or, on the other hand, they're too big to fail, think of how many people would be hurt; to, on the third hand, they're gummint creatures and we don't like gummint, so rejoice as they fail.

Let's see, that's two votes for letting them fail and one for propping them up. Fortunately, the adults are proppers, so we're safe for now, maybe, unless F&F are too big not only to fail but to save.

Once again, Restating the Obvious must jump in and state, since nobody else seems to have thought of it, that if you have a problem with things that are too big to let fail, don't let them get that big. Subdivide.

Sheesh.

This is quite apart from the argument about whether setting up F&F generations ago was a form of “interference in free markets” or not. If gummint was going to go down that path, it looks as if it should have endorsed F&F&F&F&F.

It's true that Fannie Mae and Freddie Mac interfere in the free capital markets. It is also true -- and this is something the Chicago Skoolboyz and other Milton Friedman worshippers always forget to mention -- that before the New Deal, the free capital markets were not open to people like you and me. If you or I had tried to get the local banker to underwrite a mortgage in 1928, we couldn't have gotten an appointment with him.

Anatole France said, “The law in its majesty forbids the millionaire, as well as the bum, from sleeping under bridges.” Had he been interested in finance, he might have said, “The free market gives the working stiff, as well as the plutocrat, access to Wall Street.”