Fannie and Freddie Go to Cancun

Consider this: A parent has a teenage kid asking to go to Cancun for spring break. The parent says no, and the teenager doesn't go on the trip, so the kid doesn't concern himself with certain decisions and the freedom he would have if he were able to go to Mexico.

On the contrary, if the kid is allowed to go to Mexico then he has a whole new set of possibilities to consider such as whether or not to get blackout drunk in the midst of a bunch of complete strangers and/or engage in risky sexual behavior with girls he doesn't know. Let's say the kid goes to Cancun, gets blackout drunk and along the way he meets other people and they all get drunk together and start having sex with each other. Meanwhile, mommy and daddy are home telling everyone that their kid is an angel and is sitting on the beach drinking Coca Cola. However, all of the parents' friends have seen the kid's scandalous pictures from Cancun on Facebook.

Now let's look at a real life example that actually happened. Over the last decade or two Fannie Mae and Freddie Mac (the teenagers) were forced by Congress (the parents) to lower their lending standards (go to Cancun). A key point to take note of is that in this case Fannie and Freddie did not ask to go to Cancun..... they were forced to go by mommy and daddy. So they went. The rum and tequila (money and mortgages) were flowing freely, and Fannie and Freddie had a great time meeting other crazy drunkards along the way (Lehman Brothers, Wachovia, Bear Stearns etc.). The other drunkards that they met actually had coolers that were full, so Fannie and Freddie offered to take some and store it for them. This allowed the other drunkards to drink way more than they could handle, but they didn't care, because they were having fun. Fannie and Freddie were also storing way more liquor than they actually had room for, but they didn't care either, because they were having fun too. Oh, and everyone is having drunken sex with each other. Meanwhile at home, Congress (remember: the parents) is telling everyone "Fannie and Freddie are perfectly good kids," while everyone else sees the scandalous pictures that Fannie Mae and Freddie Mac are posting on Facebook. All of the sudden one of Fannie Mae and Freddie Mac's friends, Bear Stearns, in Cancun notices a bad rash, um, south of the border. He panics, and everyone else does too. They all go home and realize that they all have STDs. Lehman Brothers actually dies from the STD. Fannie Mae, Freddie Mac, Bank of America and other friends have to be put on life support by their parents, and they barely survive. The life support provided by the parents, however, is extremely expensive and the parents max out all of their credit cards.

This story is not meant to talk about Fannie and Freddie specifically. It's infinitely more important than that. There is one glaring difference between the parents and the teenager. If the parents act responsibly then the teenager's potential for harm is limited. However, irresponsible parents allow the teenager to influence and harm many many others from all parts of the country. When a private corporation makes a decision it affects a few thousand people, maybe a few million people at most. When the government makes a decision it affects everyone, hundreds of millions of people, because we are all governed by the same people in Washington.

Why is this important? In one word: isolation. Unlike private sector decisions, the effects of government decisions are not isolated. In the case of Fannie Mae and Freddie Mac, if they had never been forced/allowed to make risky loans then this whole financial crisis and meltdown would not have happened. Maybe a bank here or there would have made some bad loans and gone under, but it would have been isolated, and we would not have had the widespread financial meltdown that occurred. However, these decisions originated in Congress or at the desk of the President, and the entire private banking sector was systematically empowered to make the risky decisions that they otherwise wouldn't have had to make.

The government absolutely should not be our parent. However, they do have certain authorities that are rightfully granted to them. If the people in charge, parents, government or whomever, act responsibly then everyone benefits.