Monday, September 08, 2008

Thoughts on the GSE Takeover

I have three reactions:

1. It was likely to happen eventually, so it is better to get on with it, as Treasury did yesterday.

2. I am saddened whenever any private profit-seeking enterprise gets bailed out, whether it is Chrysler, Long-term Capital Management, Bear Stearns, or the GSEs. Such bailouts sow the seeds of the next financial crisis by fostering expectations of future bailouts and encouraging excessive risk-taking. (And before anyone emails me that the GSE equity holders are not exactly getting a good deal here, let me point out that the debt holders are. In a capitalist system, you want those extending both debt and equity finance to bear the consequences of the risks they undertake. If the taxpayer is chipping in, someone is being insulated from risk.)

3. The problem is far from over, as the future of these institutions and a large segment of the financial system is still to be determined. The worrisome part is that this future will be determined by a political system that both created the GSEs and failed to provide sufficient oversight, even when many economists suggested reform was needed. To believe that the Congress will do a good job of it would be the triumph of hope over experience.