Questions
1. a) Which of the following statements made by economist Thomas Sowell have you heard or read about in a news story on the current financial crisis?
b) Ask a parent the same question.
- Five years ago, Barney Frank vouched for the "soundness" of Fannie Mae and Freddie Mac, and said "I do not see" any "possibility of serious financial losses to the treasury." (para. 3)
- Earlier this year, Senator Christopher Dodd praised Fannie Mae and Freddie Mac for "riding to the rescue" when other financial institutions were cutting back on mortgage loans. He too said that they "need to do more" to help subprime borrowers get better loans. (para. 5)
- In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac. (para. 10)
- Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt." (para. 14)
2. For each of the following statements, write agree or disagree. Explain your positions.
- The idea that politicians can assess risks better than people who have spent their whole careers assessing risks should have been so obviously absurd that no one would take it seriously. (para. 7)
- Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s. (para. 16)
- If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out. (para. 18)
- It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts. (para. 19)
3. a) What solution does Mr. Sowell offer for the financial crisis caused by Fannie Mae and Freddie Mac?
b) Do you agree? Explain your answer.