Markets seem to like the idea of the two massive US mortgage lenders, Fannie Mae and Freddie Mac, being bailed out by the US government. Markets will benefit, in the short term. $ 200 billion dollars to support borrowers is attractive.
But the medium and long term consequences are unlikely to be benign. This will certainly encourage moral hazard – the critical dysfunction in financial markets. And it will benefit those most able to deal with losses – the richer borrowers – rather than help the poor who have the least understanding of credit and financial risk.
This bail out has also been engineered for political gain. It is certainly not reflective of the US culture of capitalism. Rather it helps incumbent leaders look good in the face of disastrous consequences of poor policy and oversight in the past decade. But it is probably necessary to help contain the disintegration of the US economy.
Paul Krugman’s editorial in the New York Times.
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