Software Nerd

Monday, July 14, 2008

Wealth Redistribution

After bailing out Bear Stearns' creditors a few months ago, this weekend the U.S. government decided to bail out the creditors of "Fannie Mae" and "Freddie Mac".

The government's argument goes like this: these firms -- Bear, Fannie & Freddie -- are solvent but not liquid. Since they are solvent, their assets will finally be realized, and will be enough to pay off their liabilities. However, today, there is no market (or a poor market) for some of their assets. So, they cannot meet their short-term liabilities today. The situation, the government says, is analogous to a run on a well-capitalized bank, where the bank cannot meet 100% of its short-term liabilities on demand, but could if given some years.

Also, the argument goes, failure will have a "domino effect". If the government does not bail out Bear Stearns, the confusion that could ensue would bring down much larger firms. Then, one might be faced with the government bailing out someone much bigger, say Fannie Mae or Freddie Mac. Oops, they just did, anyway!

That's the pro-intervention argument. However, if these firms are so obviously in good shape, then why doesn't some other company step in. True, J.P. Morgan did step in to take over Bear Stearns, but only with the government guaranteeing about $29 billion in credit.

Who is the government though? It is you and me. However, in terms of tax-money, it is the big taxpayers in the country: the rich pay most of the taxes. So, consider this: Warren Buffet used to be a large shareholder in Fannie Mae. Then, back in 2000/2001, he sold out almost all his shares in the company. Commenting that he was uncomfortable with the risk, he said, "We're never sure if there is an iceberg situation or not. We figured we'd never see it until it's too late."

Well, Mr. Buffett, you thought you were getting out of Freddie and Fannie, but we voters are putting you right back in. Except, while we use your tax money to take the risk you refused to take, if things work out, we'll spend the profits on "No Child Left Behind".

No, I'm not sympathetic to Buffett, because he buys into this crappy philosophy as well. However, I use him to illustrate wealth-redistribution. Take from Buffett and other rich tax-payers, and pay to shareholders and creditors of Bear Stearns, Freddie and Mac. For the xenophobes among us, remember, this means paying to lots of Japanese and Chinese who thought that these U.S. companies were solid.

As for the "common man" like me, I probably won't be hit much more on taxes, but the when government creates new money, the deficit goes up and inflation rises. Inflation acts like a tax.

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2 Comments:

  • Actually, I think it will be the "common man" who suffers more. Many of the richest people hedge themselves against currency devaluation and or make more money because of it. Whereas this is not the case for "common man".

    By Anonymous Anonymous, at 8:07 PM  

  • Fannie and Freddie were run on the basis of privatizing profits and socializing risks. It was the tax payers, the government, all along that was assuming the risk because of the implicit guarantee that the USA gov. stood behind them. Now they want to make that explicit.

    It was wrong to do that before, and many critics said so. I don't have a big problem with them supporting them now to avoid worse problems AS LONG as they don't continue to privatize the profit. There has to be some level of public sharing in it if we are going to back them up.

    By OpenID lichanos, at 7:08 PM  

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