It’s a lot to be proud of, this independent capitalist system that tells the government to get lost.
Except when it doesn’t.
Headlines yesterday were Fed Chair Ben Bernanke saying the bank will extend its lending facility for investment banks for another couple of months if needed. The Fed is also working with the SEC on improving the banks’ liquidity, he said. But the Fed doesn’t have power to regulate the investment banks. Will Congress, in a busy election year, have the time to do something intelligent in regulation?
Then today’s papers say that Fannie Mae and Freddie Mac, the quasi private (at least when it comes to salaries and profits) government-sponsored buyers of mortgages, might go bust and the Fed would probably have to bail them out.
Was it John Kenneth Galbraith who talked about privatizing profits and socializing losses?
In the WSJ the provocative columnist Holman W. Jenkins does a history of bailouts going back to Continental Illinois in 1984. Better the occasional bailout than pumping money into the entire system. But the federal role is expanding, apparently without stop.
“Washington today has its fingerprints on 80 percent of new mortgages, and virtually every student loan,” he notes. Of course, the student loans could be done directly instead of through private loan providers who have earned huge profits while saddling students with huge debts.
This hybrid public-private model that seems to have taken over such as chunk of American government spending, including the private contractors and security guards in Iraq, is expensive, clumsy, and probably most important it obscures responsibility.
But it does make some people extremely rich.

Filed under: Credit Crunch, Technology, regulation, risk