Government Panic Is Killing Us And Our Banks

Over the weekend, in a move led by Treasury Secretary Henry Paulson and Federal Housing Finance Agency head James Lockhart, Fannie Mae and Freddie Mac were seized by the Federal government and its board ousted, you can read about it in pretty much every news outlet, including the Wall Street Journal.

Created during the Great Depression to keep cash flowing into the housing market, Fannie Mae and Freddie Mac were already government institutions, so technically this isn't a buyout by another party.

The problem is that the government's knee-jerk reactionary policies have already sent the banking system into a tailspin. As default rates on home loans reached critical mass, the government went on a lending and takeover binge of medium and large banks. Coupled with all its tax and regulations interferences in the market, these actions have created further distress.

First there was the $30 billion loan to J.P. Morgan to purchase the ailing Bear Stearns. The climate surrounding that caused an all-out panic that sent investors running and BSC stock to a daunting $2/share. Then came Indymac, which was closed abruptly causing me to have to wait 45 minutes in line at Washington Mutual to withdraw money for lunch because everyone thought there was a mass bank failure hitting the U.S.

There are two major effects that this kind of government intervention has on the economy: destabilizing disruption, and panic. When news gets out that a bank needs to be taken over to stay afloat, people rush in to take their money out before they're left with however many pennies on the dollar the FDIC can afford to pay.

Say what you want about motives, be it keeping incumbent politicians afloat through the election, or a legitimate concern in Washington echoing Paulson's comments that "Failure of either of them (Fannie Mae or Freddie Mac) would cause great turmoil in our financial markets here at home and around the globe." I think the government ought to have stayed out in the first place, there's no reason why they should own half of the mortgages in this country, and there's no reason why they should be bailing out banks that act incompetently, irresponsibly, or blatantly crooked.

The United States has already subsidized irresponsibility by keeping homeowners in homes they couldn't afford in the first place. Now they're perpetuating market fear, causing stock investors to jump ship in multiple sectors, which in turn causes capital to leave vanish and the economy to stagnate. Then it all comes around full circle to the the middle class who are seeing their wages shrink, and the government proceeds to add an additional burden onto taxpayers' backs by bailing out more banks at their expense.

So what happens when their backs break?

Any comments? I'd love to hear from you.