We can debate about the need for a central bank, but proposals like this and the people who propose them surely need to be canned:
ATLANTA, Jan 3 (Reuters) – A U.S. Federal Reserve economist called on Sunday for the creation of a new federal institution to backstop losses on asset-backed securities to prevent any future collapse of mortgage finance giants Fannie Mae (FNM.N) and Freddie Mac (FRE.N).
What is it about moral hazard that they don’t understand? Using public money/sovereign credit ratings to back losses on private securities, which use private money to invest in them, is negligent at best, and immoral at worst. Nice way to craft government policy.
The real substance of the idea is here:
Passmore and Fed economist Diana Hancock argued for the creation of an agency that would guarantee all forms of asset-backed securities. It would be capitalized by insurance premiums charged to financial institutions, much like the current Federal Deposit Insurance Corp system, Passmore said.
“It resolves the problems associated with systemic risk,” Passmore said.
Resolves the problem? Hardly. All it does is ask everyone who issues these things to put money into a pot to cover the losses, which are then given a government rubber-stamp. And who will determine what the insurance rates will be? How will these securities be rated? By whom? We already have securities ratings and we see how they’ve worked out. Besides, there is one glaring issue with this asinine idea: nothing would ever be done to enforce prudent loan underwriting. Underwriting that was taking a turn for the worse all the way back to 2005. I don’t care what you do. If you don’t take care of the root of the problem, nothing will ever get resolved.
But let’s get back to policy and the policy makers. Are we to believe all government policy options are rangebound between negligent and immoral? I don’t think so. I think it points out we need better policy makers. Which means a lot of government officials need to be tossed out on their ass.
Just give these people their walking papers already. Happy Friggin’ New Year.