Skip navigation

One of the justifications for federalism (at least in the US) is the 50 State legislatures act as ‘laboratories of federalism’, experimenting with different policy solutions to intractable problems.

What the GFC demonstrates is the converse proposition – one central government is riskier than having 50 laboratories of federalism. The Fannie Mae/Freddie Mac experiment with using elegant financial innovation to lower risk of poor subprime lenders was a good idea (on paper at least), but its execution was dismal. It turned an ordinary boom/bust cycle in one very small portion of the US mortgage market into an international contagion. By setting up a national mortgage market in one of the largest economies in the world, and then amplifying the subprime mortgage market by encouraging securitisation and by marketing those asset-backed securities to institutional investors across the world, the US Government must be held responsible for the economic catastophe that occured.

The great irony is that it happened with bipartisan consensus. If the Democrats had gone it alone, with a wholly publicly owned Fannie Mae/Freddie Mac, we would not have seen such aggressive marketing. If the Republicans had allowed the private sector securitisation firms to do it, the problem would not have been amplified into a global problem. The incentives would not have been perverted. A disaster would have been averted.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: