Quote Originally Posted by maladroit
you and dr paul make a good point about the government encouraging F&F to be too big...the bush administration (and congress) leaned on F&F to issue half a trillion dollars of mortgage loans to low income families AFTER US home ownership had reached record levels, and then fannie and freddie were used to buy up bad loans from banks...the government screwed up big time....despite his common sense talk, i am doubtful that the subprime crisis would have been avoided under ron paul if he were president...correct me if i am wrong, but dr paul is anti-regulation and the private banks caused most of the problems leading up to the subprime crisis...they screwed up even bigger time
The issue boils down to the misappropriation of money entering the real estate market. This was a real estate market that was heavily regulated (not correctly regulated), and when granting privileges to GSE's, it soon allowed investment to pool into what was considered a government backed sector. Had normal market practices been in place, money would not have foolishly flowed into the real estate market.

Moody's along with S&P would have faced much smaller growth potential in a slowing housing market, so they did what government does, although it was technically illegal for them; they pump primed the housing sector by giving bad paper good ratings. This in turn created an artificial housing boom (F&F government backing along with artificial demand created out of dishonest analysis), especially that of sub prime debt (junk being peddled off as > B+ rating). Yet the analysis market is heavily regulated, of which only 3 firms, but mostly the big two (Moody's and S&P) make the calls. Would they have been able to practice fraud had more firms had a clear entrance into that market??? I believe not...


HOWEVER the too-big-to-fail argument was used to justify the bail out of the private non-regulated banks too, and those bum mortgage loans and mortgage backed securities would have been issued even if fannie and freddie never existed, so the bubble and bailout would have happened anyway, although it might have cost less if the risk was spread around to smaller banks that weren't too big to fail...their failure is an additional cost to americans who had business with them on top of the taxpayers money used for the bailouts so it's a wash on a per capita basis
The bubble would not have happened if the marginal propensity for real estate investment was not that high. Granting special privileges, and distorting the market allowed it to surface...

the federal gov't demonstrated it's willingness to 'intervene' in the financial markets when george bush's daddy threw $120 billion at the savings and loan crisis...perhaps that contributed to the failure of the banks' self-interest to self-regulate their affairs
Like i have been saying, this bailout is only a temporary fix; i also believe the frequency of such events has increased due to economic ultrainterventionist policy...