Too Big to Fail?

The US has long been wary about moral hazard in financing – the fact that any expectation of rescues can increase risk-taking behavior. In the past, US capitalists urged stern measures, expecting companies and countries to pursue risks and accept losses if their ventures failed. As an economic recession looms, the US government increasingly engages in its own interventions, including a measure to save the government-sponsored mortgage companies known as Freddie Mac and Fannie Mae. The two firms guarantee nearly half of the nation’s $12 trillion in home mortgages. Proponents of intervention argue that failure could trigger an avalanche of troubles for the housing, banking and other industries, explains Peter Goodman in the New York Times. The woes would extend to foreign investors who purchased stocks and bonds associated with these industries, after trusting US government and credit-rating agency assurances that such investments carried low risk. Critics contend that mismanaged companies get a break, while taxpayers carry the bill. “Meanwhile, as American debts swell and foreigners hold more of it, nervousness grows that, some day, this arrangement will end badly,” Goodman notes. The writer concludes that ongoing help for those “too big to fail” is carrying costs too big to bear. – YaleGlobal