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People are complaining that this was a destabilizing bill. And yet, the current crisis is largely due to stabilizers: Fannie and Freddie manipulated mortgage pr
by byrneseyeview 18y ago
People are complaining that this was a destabilizing bill. And yet, the current crisis is largely due to stabilizers: Fannie and Freddie manipulated mortgage prices to make them trade like treasuries, leading to artificial stability; AIG sold CDSs as part of a regulatory arbitrage, leading to a collapse later on; depositors didn't have any reason to care whether their bank was lending to someone who put 50% down on a first home or 0% down on a no-doc third home -- whatever happened, the FDIC would take care of it!
It is impossible to imagine an alternative history in which a lack of ostensibly stabilizing regulations led to a larger crisis. These rules will tend to reduce the chance of a small disaster, and amplify the effects of a massive one. Thanks to Fannie and Freddie, housing prices couldn't drop 5% in a year -- they could rise 10%, or they could drop by 20%.