Government Sponsored Enterprises are Not the Free Market or in The Bahamas

First Published: 2010-05-29

After reading Dr. Rodgers last response, I will offer one final one of my own as I cannot let the highly misleading claims he makes pass without comment.

Dr. Rodgers tries to argue that because the Federal Reserve, Fannie Mae, and Freddie Mac are “privately owned,” their failures represent a failure of free markets. Nothing could be further from the truth.  Rodgers is correct that (at least until Freddie and Fannie were nationalized in the fall of 2008) each is technically “privately owned,” but they are not at all “free market” firms in the way we think of Apple, Ford, or the grocery store down the street. All three were created by acts of the US Congress and all three have very important privileges granted to them by the federal government that insulate them from the rigors of market competition. None of the three would exist in a truly free market and it is precisely the ways in which they are protected by government that made them key contributors to the financial crisis and recession.

The Federal Reserve was created by Congress and was granted a government monopoly over the production of currency. It has a whole other variety of privileges that no other privately owned institution possesses. It is the Fed’s role as the only supplier of reserves to the US banking system that enabled it to expand the supply of credit, fueling the housing boom. This is not in any way, shape, or form “the free market.” This is a government-granted monopoly interfering with true market competition.  Government created the Fed and sustains it.

Fannie Mae and Freddie Mac were created by Congress as “government sponsored enterprises” (that is their officially recognized category). That name, which I used and Rodgers quoted, makes clear that these are not part of any “free market.” Each of these two entities, like the Fed, has access to special government privileges, most importantly lines of credit and implicit taxpayer guarantees, that removed the risk associated with their buying up all kinds of risky loans generated by mortgage brokers. Neither entity would exist in a truly free market and all of the absurd loans they stood willing to buy with taxpayer dollars backing them never would have found a market.

If the Fed, Fannie, and Freddie are responsible for the boom and bust, and I think Dr. Rodgers agrees with me that they played at least some role (I’d say a huge one), then it is simply factually incorrect to say that the free market failed. Those three institutions were all created, nurtured, and sustained by government and were thereby insulated from the competitive world of profit and loss that defines a free market.

The US economy may be the “freest” one on the planet, but it is not a “free market.” The failures that led to the recession were significantly caused by three government sponsored enterprises, not by the free market.

Steven Horwitz
Charles A. Dana Professor of Economics
Department of Economics
Hepburn Hall
St. Lawrence University
Canton, NY 13617
TEL (315) 229 5731
FAX (315) 229 5819
Email sghorwitz @ stlawu.edu

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