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November 04, 2009

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Fannie Mae was not the only entity securitizing mortgages. Every Wall Street firm was doing it, and it was Wall Street’s massive demand for mortgages that drove the incentive system whereby mortgage brokers and originators were writing and selling loans that were destined to fail. Blaming everything on Washington DC makes your ideological point, but is hugely inaccurate.

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I appreciate your observation and, of course, you are right, to a point. But the timing is important to understanding the causality. The mandate from Washington was not necessary if Wall Street in general, and lenders in particular, would have originated these marginal loans on their own. They would not, and hence the interference from the government was deemed necessary to encourage or require that such “otherwise uncreditworthy” loans were made. I single out Fannie Mae because it profited. Fannie Mae is a government sponsored enterprise, and should NOT make a profit, since it is taxpayers money they put at risk. Private industry on Wall Street should profit; that what businesses are supposed to do. That is how they provide jobs, build capital, grow the economy, and create wealth. If they fail to create wealth, then they go out of business. That, too, is what is supposed to happen. If any of those Wall Street executives did anything illegal in the pursuit of those profits, there are laws on the books that can be prosecuted and they will be held accountable. What if a government entity does something untoward? What happens to it? Nothing. There is no free market comeuppance for Washington shenanigans.

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