Plain Money ideas

A failure of deregulation?

Is the current meltdown a failure of deregulation and private markets? Consider these important facts and then make up your mind:

  • Fannie Mae and Freddie Mac were the key players.
  • Fannie and Freddie are GSE’s — that is, government-sponsored enterprises. That means they were, uh, sponsored by the government. Not only that, they were chartered and regulated by the government.
  • Fannie and Freddie took huge risks with an implicit guarantee that the taxpayers would pick up the tab if they failed. That implicit guarantee has now become explicit.

There’s an easy narrative that says “We didn’t regulate.” In the case of Fannie and Freddie, that’s simply wrong.

Maybe in the future we will regulate players like Freddie and Fannie better than we did.  I hope so. Make no mistake about it though: Fannie and Freddie were government chartered and government regulated. They were not private and they were not deregulated. (Plenty of people took stupid risks with the securities that Fannie and Freddie enabled, but that’s another story.)

One more important note: This is not really a partisan point. Here, for example, is a columnist who favors Sen. Obama for president and recognizes that deregulation is not the source of the current financial troubles. And the Washington Post, hardly a bastion of conservatism, has a thoughtful piece showing how the 2008 meltdown was a failure of distorted markets, not free markets.