Tuesday, July 15, 2008

The Politics of Bailouts

Yesterday, I had discussed one economic aspect (moral hazard) posed by the bailout of Fannie Mae and Freddie Mac, government-sponsored enterprises.

Today, our friends at the Heritage Foundation offer a public choice perspective by explaining why so many politicians are interested in a bailout.

A snippet:

When Fannie’s accounting scandal came to light in 2004, conservatives pushed hard for reforms to phase out Fannie and Freddie. Led by former Walter Mondale and Barack Obama campaign adviser James Johnson, Fannie and Freddie pushed back hard, raising millions of dollars for members of the relevant oversight committees and opening up “Partnership Offices” that funneled money into various housing projects in districts of key members of Congress.

This problem, with some attention, could have been solved years ago. But, as always with politics, it's worth asking, "Cui bono?" The answer is politicians who think they can always effectively address "market failure" without engendering "government failure."

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