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Mira Farka, assistant professor of economics, CSUF  

Click Here for a Bio of Mira Farka


Wednesday, July 30, 2008
Ready for the big one?
Tuesday, December 02, 2008
Atlas shrugged
Red Capitalism?
For a brief moment a couple of weeks back, when Hank Paulson, the Congress and the Fed rushed to the rescue of Fannie Mae and Freddie Mac, I had one of those strange flashbacks of being in a socialist Albania of 20 years ago (that’s my birth country), and the nightmarish slogan of “from each according to his ability to his according to his needs” (which I thought long forgotten), started ringing loud in my ears.

The able ones in this case would be us - the taxpayers – and the needy ones the mortgage semi-independent government-backed mortgage giants Freddie and Fannie. Once again, we would shoulder a massive bail-out (remember Bear Sterns?), carrying the risk and forfeiting the rewards. As the Economist cleverly puts it: “at Fannie and Freddie – and, shockingly, at the investment banks- the profits were privatized, but the risks were socialized.”  The appropriate term for this profit-sharing scheme would be “red capitalism.”

Nonetheless, despite my theoretical objections, I think the steps taken by our policy makers in this case, under these very precarious conditions, were the right ones. Fannie and Freddie back more than half of the outstanding mortgages in the economy; %5.2 trillion on the back of an $83.2 billion core capital. With the recent credit crunch and financial squeeze on other lenders, Fannie and Freddie have become more important than ever, financing around 80% of mortgages in the first quarter of this year. Were they allowed to fail, the entire financial system would collapse with unthinkable damages to the housing market (which would resemble more a house of cards). Sad to admit, but Fannie and Freddie have become “too big to fail.”

But while I can swallow their rescue operations in the name of “financial stability,” I continue to remain concerned with the issue of how we got here. Perhaps the two mortgage companies should have never been allowed to blow to gigantic proportions, perhaps tighter regulation should have been in place, perhaps higher capital requirements should have been demanded.

There are a lot more “perhaps” in the same vein. And perhaps we should start implementing them, slowly and steadily. If Fannie and Freddie are not going to be privatized (this ship seem to have sailed a while back), then let’s put a tighter leash on them, let’s not allow them to borrow cheaply (on the back of the US government guarantee) and sell expensively turning up extraordinary profits in the process, let’s limit them from risky derivative trading (which is around $2.3 trillion). If we are going to bail them out in bad times, let’s lean on them harder during good times. And yes, I realize the irony of my proposition: more government regulation is the very nemesis of free markets. But given the hand we’re dealt, closing the big gates of “red capitalism” and keeping a small window for ventilation seems to be the only solution, at least for the short term.