Tuesday, September 23, 2008

The Wall Street Journal Describes the Past Two Weeks

The financial crisis paper of record describes the actions of the federal government in the last two weeks to free market private enterprise:

1) Nationalized Fannie Mae and Freddie Mac and flooded the mortgage market with taxpayer funds to keep it going [fired their chief executives (Herb Allison replacing Daniel Mudd at Fannie and David Moffet replacing Richard Syron at Freddie) and run by the Federal Housing Finance Agency].

2) Crafted a deal to seize the nation's largest insurer, American International Group Inc, fired its chief executive and moved to sell it off in pieces [The Federal Reserve gave AIG an $85 billion rescue loan in exchange for an 80% ownership stake in the company].

3) Extended government insurance beyond bank deposits to $3.4 trillion in money-market mutual funds for a year.

4) Banned, for 799 financial stocks, a practice at the heart of stock trading, the short-selling in which investors seek to profit from falling stock prices.

5) Allowed or encouraged the collapse or sale of two of the four remaining, free-standing investment banks: Lehman Brothers and Merrill Lynch.

6) Asked Congress by next week to agree to stick taxpayers with hundreds of billions of dollars of illiquid assets from financial institutions so those institutions can raise capital and resume lending.

The WSJ on its Sept 20-21, 2008 Opinion page gives us a cautionary warning:
"As for insuring money-fund deposits, this too carries substantial taxpayer risk. The Treasury money-fund protection is unlimited, while insurance on bank deposits stops at $100,000. As word of this disparity spreads, millions of Americans will figure out that they should drop their bank savings account and get into a higher-yielding (and now also protected) money fund. Even if Treasury levels this playing field, money funds will have the advantage because of their higher return. Fund managers may also be encouraged to take greater risk, knowing that they have
Uncle Sam's guarantee."

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