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The Democratic Strategist

Political Strategy for a Permanent Democratic Majority

Fannie Mae, Freddie Mac, and Moral Hazard

Worried about the precedent being set by federal bail-outs of mortgage giants Fannie Mae and Freddie Mac, and before that, Bear Stearns?
At Huffpo today, progressive economist Jared Bernstein suggests this isn’t the best time to be worrying about the “moral hazard” of efforts to prevent a financial meltdown:

[Y]es, moral hazard is a big problem that contributes to the underpricing of risk (which, at some level, is the main factor behind all the bad stuff that’s happening now). But the time to worry about moral hazard is not the weekend when the big bank is failing. It’s years before, when you’re setting up the regulations under which the financial system can flourish without going off the rails.
These are tough challenges, and deep-pocketed, powerful forces will fight reform every step of the way. It’s going to take equally tough, persistent focus by the next administration and Congress to craft the regulations that truly promote greater stability in the financial system. Enough already with the shampoo approach to economic growth: bubble, bust, repeat.

In other words, the key thing to focus on right now is preventing the situations that lead to the choice of moral hazard or real-world calamity. And as Bernstein concludes: “Maybe it’s me, but I don’t think the McCain/Gramm team is up to the challenge.”

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