Regulating Towards Institutionalized Bailouts

I have a new commentary published today, “Regulation Proposals Could Lead to JP Morgan Mae and Citi Mac.” Considering the recent proposal from the White House for how to overhaul the financial sector, I believe that aspects of the plan could combine to create GSEs and a system of institutionalized bailouts:

If there is anything crystal clear about the evolution of the financial crisis, it’s that Fannie Mae and Freddie Mac were problems. These government sponsored entities (GSEs) significantly contributed to the housing bubble by taking excessive subprime risk, knowing they had a taxpayer funded safety net backing their $1 trillion exposure. Exacerbating the excessive risk taking behavior was the Congressional protection Fannie and Freddie enjoyed—particularly from Rep. Barney Frank and Sen. Chris Dodd, who stopped GSE reform in 2003.

Logic would suggest that Washington should avoid creating more Frannies and Freddies. But President Obama’s proposed financial sector regulatory overhaul will ironically wind up turning the largest private financial companies into GSE-like entities, with an institutionalized bailout system.

See here to read the rest of the article.

Read more about the regulation process here.