Are double standards justified for the fed?

By CEO Talk by
Thongchai Bushapan
Executive director of Noble Development
Published on September 18, 2008

As I write this column, the United States Federal Reserve has made it to the front page with their decision to rescue Freddie Mac and Fannie Mae - two mammoth governmentsponsored agencies that together own US$6 trillion (Bt205.34 bil¬lion), or about half of US residen¬tialmortgage credit.

However, the vicious mix of investor greed (which drove them to demand highyield papers from Freddie Mac and Fannie Mae) and the misconception that these agencies were backed by the government, got the agencies high credit ratings for their securitisation paper.

Officially though, Freddie Mac and Fannie are not given any back¬ing, insurance or statutory support by the US government.

The deepening subprime mortgage crisis has affected the two agencies severely and the US gov¬ernment decided it had no choice but to step in because Freddie Mac and Fannie Mae are too big to be allowed to fail. In the final analysis though, it is the US taxpayer who will bear the brunt of this rescue.

I remember that when in 1997, I had met Federal Reserve officials, scholars, economists and business¬men, all of them harped about how one should let the market take con¬trol of the situation.

They all thought that any gov¬ernment intervention in financial institutions only worsens the prob¬lem and it could create a "moral haz¬ard" wherein investors enter high risk deals on the hope that if the deal goes bust, they will not get hurt and the taxpayers money will be used to rescue them.

I believe the advice they gave us was genuine but I cannot help com¬pare that with today's problem.

Why is the Fed ignoring the same principle? Is there no moral hazard attached with this rescue?

Or is it okay for the Fed to subscribe to double standards and can do anything they want?

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Are double standards justified for the fed?

As I write this column, the United States Federal Reserve has made it to the front page with their decision to rescue Freddie Mac and Fannie Mae - two mammoth governmentsponsored agencies that together own US$6 trillion (Bt205.34 bil¬lion), or about half of US residen¬tialmortgage credit.

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