THE BOLD FREE MARKETEERS ARE AT IT AGAIN

3/4/09

I sent the following letter to the Wall Street Journal in response to an article on the Fannie and Freddie bailout. The naked hypocrisy of those rugged capitalists at the Journal never ceases to amaze me:

3/4/09

In his 3/4/09 Opinion piece entitled “Rethinking the Fan and Fred Takeover,” in which he argues that the value of the common equity in Fannie and Freddie should have somehow been preserved rather than wiped out in the federal takeover of those ill-fated institutions, Holman W. Jenkins, Jr. concludes:

“Nothing was inevitable about the collapse of equity values that has made the banking problem so much more difficult.”

No, nothing was inevitable about the collapse of equity values in the financial sector…until managements squandered their shareholders’ capital on addle-brained “investments” to the point at which the taxpayers were forced to step in to save the creditors and the counterparties who also should have known better, but that is another issue.

Repeating arguments employed by Bill Miller and Edward Lampert, two money managers who made astronomical long bets on Fannie and Freddie and lost huge (and now, as is common with big time money managers who talk free market when times are good and beg for federal succor when things don’t go perfectly, are whining like petulant teenagers), Mr. Jenkins echoes the plaint that the government ought to encourage private investment in the financial sector. The idea, however, is not for the government to encourage investment for the sake of investment, and certainly not to encourage investment in poorly conceived, mismanaged institutions. In fact, the government ought to encourage very little, other than the free functioning of markets. And it is the function of the markets to encourage not just wholesale investment but, rather, investment in profitable enterprises, thus channeling capital to its most productive, rather than the most politically favored, uses. As those of us who still remember free markets know, that is how they once worked.