The government and the credit crisis

It has been wisely observed that you can ignore politics, but politics won’t ignore you. Quite frankly I am not very happy with the offerings of either party when it comes to economic policy. Republicans talk a lot about economic freedom, but they seem to be best at crony capitalism. The Democrats siren song of endless government solutions seems to amount to crony socialism. Meanwhile current federal policy has been aptly described as “public risk combined with private gain”.

Fannie and Freddie are the poster children of this paradox. Last fall the British central bank had propped up the liquidity at one of their larger banks called Northern Rock. I cringed when they nationalized it. When the Federal Reserve paid Chase $28B to take over Bear Stearns in March of this year I was livid both as a tax payer and as a banker.

The fed effectively nationalized the liabilities of the major investment banks in the country. We compete against these institutions. The Fed coughed up public money to bail out a failed institution they don’t even supervise. How can we even pretend that financial services is a free market? At least when the British have to nationalize an institution, they get the assets along with the liabilities.

When the dust settles there will be very important hearings. Congress will turn on the klieg lights and hector a few bad guys. There will be some serious policy changes. We need to hope for and work for positive change. The current problem must be fixed. I know that socialist medicine will be worse than the disease, but one can’t defend the current allocation of risk between the public purse and private capital.

My best hope is that Congress will recognize and reinforce the role smaller independent banks play in doing real business with real people on a sustainable basis. Maybe they should nationalize the so called “too big to fail banks” and let us compete against them.

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