Big Business and the Collapse of the American Mark

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Big Business and the Collapse of the American Market

Joel Cameron Beckwith

February 25, 2005

Greenspan's warning to mortgage lender Fannie Mae late last week chiding the company that it needs to slim down strongly punctuated recent criticism of the company by economists, highlighting concern that certain big businesses put the whole American economy at extreme risk.

Forbes commented, "[Greenspan], who told the House Financial Services Committee in testimony that he sees "no reasonable basis" for the two giant mortgage companies to hold massive mortgage portfolios, which together top $1.5 trillion. Noting that the problems "are almost inevitable," Greenspan warned House lawmakers that Congress ought to consider forcing the two to slim down their portfolio holdings as they "potentially create ever-growing potential for systemic risk down the road."

One economist that has long been critical of Fannie Mae is Dr. Larry Parks, founder of the Foundation for the Advancement of Monetary Education (www.fame.org). Congressman Ron Paul has also added his voice, stating the following:

"With all federal intervention in the economy, housing welfare distorts the mortgage industry and makes ordinary Americans poorer. Banks, of course, love federal mortgage programs- after all, the risk of default is transferred to American taxpayers. The lending mortgage banks get paid whether homebuyers default or not, and what business wouldn't love having the federal government guarantee the profitability of its ventures? Between the Federal Housing Administration, which is the largest insurer of mortgages in the world, and the government-created Fannie Mae and Freddie Mac corporations, the mortgage market is hopelessly distorted. Millions of mortgages in this country are federally insured, and the tax bill for defaults could be astronomical if the housing bubble bursts."

Parallels from Recent History

Ayn Rand wrote in Philosophy - Who Needs It? , that the American government finances itself on credit based on the value of your future labor. "It borrows money from you today, which is to be repaid by the money it will borrow from you tomorrow, which is to be repaid with the money it will borrow from you the day after tomorrow, and so on." Fannie Mae enjoys special privilege to the credit created from this debt-spiral. Fannie Mae collects the profits from good loans (bets) it makes with ultimately federal credit while the taxpayer provides collateral for its bad loans (bets) should they fail or default.

How long can this continue?

The situation seen in Japan 15 years ago might have some clues. Benjamin Powell of Mises Institute explains, " The [Japanese] government attempted to offset the stronger yen by drastically easing monetary policy between January 1986 and February 1987. During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed