Gerard Baker in the Times of London: (via Mankiw)
Take the US mortgage market at the heart of the present crisis. One of the largest sources of the problem is the role of Fannie Mae and Freddie Mac, the giant US mortgage companies, government-sponsored enterprises that hold or guarantee almost half of America’s $11 trillion mortgage market. They facilitated much of the explosion of the mortgage-backed securities market in the US and they did so because investors always believed that these oddly public-private hybrids carried an implicit government guarantee. (They were right.)Critics gave warning repeatedly that if they were not scaled back they would threaten the stability of the whole financial system. (They were right again.)
The idea that these two collapsing behemoths somehow represent a failure of the market is about as plausible as saying that the collapsing boxer falling to his knees somehow represents a failure of the canvas.
Nor is it the case, as capitalism’s critics maintain, that the regulatory structure has been dismantled. On the contrary, the US system of financial regulation has been built up over the years into a staggering skyscraper of rules and institutions that induce a sort of governing paralysis.
The regulatory framework is not too small. It is a mess…
