This weekend saw the 2nd largest bank failure in US history. Now comes word that the federal government will step in to bail out Fannie Mae and Freddie Mac, two public companies (really government-sponsored enterprises, or GSEs) which have for decades relied on an implicit federal government guarantee of their debt to borrow cheaply to finance a liquid secondary market for home mortgage loans. So how does Fannie, Freddie, and you relate?
These events serve notice that risk is socialized in this country, at least for certain parties. The Fed will be printing money to deal with Fannie and Freddie mess.
Undoubtedly, many will cite this event as an example of a market failure. The mess started with the fact that these entities enjoyed a government guarantee which effectively subsidized their cost of borrowing, thereby encouraging the management of those GSEs to engage in riskier business than they should have.
Anyways, at the end of the day it will be the taxpayers who pay for it. The businessmen and women don’t have the benefit of a government bailout when their enterprises hit a rough patch gain in admiration.