Out of Control Policy Blog

The good in the seizure

At first it might be hard to accept that there is some good in the Treasury Department's plan to fully engulf Freddie Mac and Fannie Mae. The government says the good in it all is that they are helping homeowners. Those on Wall Street who saw their stocks rise today on the bailout news might claim that is the good. But actually the best thing to come out of this is the firing of Daniel Mudd and Richard Syron, chief executives of Fannie and Freddie respectively.

In what the Wall Street Journal calls the "most dramatic market intervention in years" for the U.S. government, Secretary Henry "I have a plan" Paulson is pledging up to $200 billion to bailout the mortgage giants. But his plan also shakes up the leadership at both FMs and puts them on a multi-year plan to potentially go private again one day.

The proper free market responses to the so-called "crisis" consisted of letting failing firms fail on their bad investments, letting investors lose their money on poor investments, and letting executives lose their jobs on bad investments. On these counts the government got one right.

When the government bailed out Bear Sterns in the spring, they failed to require a change in leadership. At the highest levels of America's financial firms, executives made decisions, good and bad, that were risky‚Äďand they knew it. Poor leadership and judgment led struggling institutions to where they are today. Not every bank is failing, not every mortgage lender was full of subprime. In the end actions have consequences and leaders must be held accountable for both the good and the bad.

While this bail out may be one small step for homeowners, one giant leap towards a more socialist society, at least the government fired the failures.

Anthony Randazzo is Director of Economic Research


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