Bailouts!

There is little that I hate more than a Bailout. I hate it when a referee bails a player out. When Chris Leak throws an interception at the end of the first half of the 2006 gator at vols football game, a referee should not call a roughing the passer call when there is very little contact on the pass. That play was a difference in the game. The same is true when government interferes with the market and bails a company out. Lets discuss the recent financial institution bailouts.

When Fannie Mae was created in 1938 and then Freddie Mac later, the purpose was to ensure that people who wanted loans could more easily get them. Fannie Mae was started during the Great Depression, which was caused by stupid government policy, and Freddie Mac was created because of what Wayne Winegarden calls "Corporate Social Responsibility" being combined with a for-profit business model. Government has a reason to make people happy and thus creates institutions to help them- "Corporate Social Responsibility." But does this in a market that is best ran by using for-profit businesses model that is now being interfered with. This interference in the economy creates unexpected consequences.

These government created and backed companies will buy up mortgages and loans from other institutions taking the risk off of them. This allows for more mortgages at lower interest rates from those intuitions. The issue is in the incentives created by these government institutions. Bad loans are made because the losses are protected by the government, meaning tax payer. When there is little or no risk involved, bad choices are made. This interferes with an otherwise free market. More investments are made into mortgages that should be made other places if it were not for the subsidized mortgage loans that have very low interest rates. This raises the interest rates for loans in other areas that would have more people wanting loans if it were not for the artificially low interest rates in the mortgage market. This thus slows down the economy in other sectors meaning the health of the housing market becomes even more vital to the overall economy. When the housing market then struggles the whole economy is hurt even worse. Thus our present situation.

This is why the housing bubble enlarged so much so quickly. Now that it has burst the government has bailed them out which adds to the easiness of making stupid loans in the future. Thus the economy will rebound in the next few years, more bad loans will be made, and in a decade or so the government will once again bail out these companies when that bubble bursts. I can not complain about the current bailout because without it a crisis would pursue. But we now need to get government out of the whole business of interfering with the free market. People should get loans based on income, credit history, work history, etc, and companies should start reaping the costs of making bad loans as well as the benefits. This means there will be no housing bubble forming, fewer people will buy homes, but we will not have massive downturns either in our markets and economies like we have now.

The only thing worse than a government ran operation is government interfering with otherwise free markets which have even a worse effect on the economy. I hope this is the last bailout I hear of in my lifetime. But I know that it will be one of many to come in our entitlement mentality nature that the government has created.