http://www.mises.org/fullstory.asp?control=1463snip>
The fact that a large portion of mortgages is currently concentrated in few hands poses a greater risk to the financial system, so it is held, than if ownership was widely diffused. Hence, according to Greenspan, if the real estate market should suddenly weaken this could pose a serious threat to the financial system and to the economy.
Furthermore, according to Greenspan, because of their size both Fannie Mae and Freddie Mac know that the government will not allow them to go belly up. It is this that makes them less prudent in accumulating massive amount of debts and assets: the moral hazard at work.
But this is not only applicable to Fannie and Freddie, it is also applicable to most large U.S. banks. In fact the entire banking system is built around the ongoing support provided by the Fed's monetary pumping. So why single out Fannie and Freddie? Now, even if we didn't have such institutions as Fannie and Freddie, due to the Fed's loose monetary policies we would still have undesired symptoms regarding the housing market.
snip>
Can then a stricter regulation of GSE's, as suggested by Greenspan, eliminate the risk of a plunge in the real estate market? As long as the Fed continues with its loose monetary policies, it will not be possible to eliminate this risk. Once loose monetary policy is activated it immediately sets in motion the process of a false economic boom, or financial bubble, which sooner or later must be liquidated because it is unsustainable. The longer the false boom, the more liquidations will be required. Loose monetary policy gives rise to various higher risk activities that prior to this policy would never have been considered. Hence, once the flow of money slows down the existence of these activities is threatened.
more...
Printer-friendly format
Email this thread to a friend
Bookmark this thread
(1000+ posts)
Send PM |
Profile |
Ignore
