Monday, September 22, 2008

Could we please stop saying that it was the hybrid feature of Fannie/Freddie that caused them to fail?

I think we have enough failures across enough different types of financial institutions (Investment Banks, Commercial Banks, Thrifts,Insurance Companies and GSEs), and sufficiently (ahem) large rescue packages for them that we can say that the US financial system has very few purely private financial institutions (sorry Lehman Brothers).

Perhaps the new rule going forward is going to have to be that any financial institutions with assets of greater than $X billion will be required to have paid-in capital of greater than Y percent. I have no idea what X and Y should be, but the costs of making X a little too small and Y a little too big are almost surely smaller than the costs of the converse.

2 comments:

Anonymous said...

Indeed, hybrids were not the problem. Total debt to GDP of 350%is the problem. Borrowing virtually the entire amount from abroad is the problem. Credit standards out of step with the rest of the world is the problem.

Anonymous said...

Good advice. Unfortunately we elect people that take lots of money from people that have large Xs and want Y to be small. And those people we elect go along with those that give them lots of money. My guess is that even if we did what you suggest over time the money politicians got from Xs would outweigh their concern about the future and they would make Y small to keep getting big checks from Xs. Maybe we will elect people that won't do that but it doesn't seem that likely given our track record.