This article highlights the role the Federal Home Loan Banks, aka Flubs, played in building the market distortions that led to the financial collapse. Read the whole thing.
It didn’t have to turn out this way. In 2002 and 2006, the Federal Deposit Insurance Corporation attempted to take steps that might have discouraged the kind of excessive borrowing from FHLBs we’ve seen during the mortgage bubble and collapse. The agency proposed charging higher premiums of the heaviest borrowers. The idea was simple: Normal insurance companies charge higher premiums when more money is at greater risk, so why shouldn’t the FDIC? During the current mortgage crisis, a bank with a large appetite for FHLB loans has been the equivalent of a Ferrari driven by a teenager. [emp added]
Normal insurance companies would be those evil free-market companies run by greedy capitalists. The Flubs by contrast answered only to wise, prudent, altruistic politicians.
“If you look at some of the firms whose names have been in the headlines, some of them were the largest borrowers in the FHLB system,” adds Mark Flannery, a finance professor at the University of Florida. “It suggests, with hindsight, that the ability to borrow that money might have been a factor” in the current wave of bank failures.
Gee, you think? Of course our wise and wonderful political masters understand that people play a lot more recklessly with other people’s money than with their own. They do, right? I mean, they would never create a system which used government money to induce reckless behavior, right?
I keep coming back to this central concept: The Federal government over the last 40 years has set out to distort the market in the direction of making risky loans. Now we have a crisis caused by making too many risky loans. Who do the leftists blame for the crisis? The free market.
Really, we’re supposed to take these people seriously? The banking system did just what the leftists wanted it to do and now the free market is to blame?