Let the Market Do Its Thing

Story Highlights:

• Amid hand-wringing over broken capital markets, there has been markedly little government intervention.
• The Office of Federal Housing Enterprise Oversight (Ofheo) lifted a 2006 cap on Fannie Mae and Freddie Mac mortgage portfolios—reducing regulatory limits and allowing these industry giants to purchase more debt where others are unable.
• The US government has chosen to work cooperatively with Sovereign Wealth Funds (SWFs) instead of pursuing protectionist legislation.
• Politicians talk big but usually do little—which is perfectly fine with us!

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Regulation often aggravates the problem it's trying to solve. Here's a pertinent example of ill-advised government regulation gone wrong:

AAA Oligopoly
By Staff, The Wall Street Journal
https://online.wsj.com/article/SB120406606170094695.html

But hidden in the credit crisis clamor, a little noticed development makes us smile—no sweeping legislative or regulatory change has taken root. In fact, we've noticed some burdensome regulatory requirements have been recently rolled back.

If you read online news sources early this morning, you would have gone to the water cooler thinking Fannie Mae, the nation's biggest mortgage lender, reported a $3.6 billion fourth quarter loss—and stocks were down because of it.

Flash forward an hour, and the below headline replaced the earlier one after the Office of Federal Housing Enterprise Oversight (Ofheo) lifted a 2006 cap on Fannie Mae and Freddie Mac mortgage portfolios.

Fannie Mae, Freddie Mac Portfolio Caps Will Be Lifted
By Jody Shenn, Bloomberg.com
https://www.bloomberg.com/apps/news?pid=20601087&sid=a_0ymI04j76M&refer=home

Statement of Ofheo Director James B. Lockhart
By James B. Lockhart, OFHEO.gov
https://www.ofheo.gov/newsroom.aspx?ID=416&q1=1&q2=None

The regulation was originally mandated to address the firms' inability to file accurate and timely financial reports. But with Fannie Mae punctually submitting its report this morning, and Freddie Mac expected to submit tomorrow, Ofheo decided to remove the mortgage portfolio caps it imposed in 2006. According to Bloomberg, these two giants make up more than 45% of the $11.5 trillion residential mortgage market. Enabling them to buy more loans could help melt frigid secondary credit markets. This is a small thing, but a telling one. Instead of sweeping new regulations, committee investigations, or new prohibitions…restrictions are actually being lifted on some embattled credit crunch veterans.

We also applaud the US government seeking to work cooperatively with Sovereign Wealth Funds (SWFs) regarding their investment practices. (For more on the controversy surrounding SWF investment, see "America for Sale," 1/16/2008.)

U.S. Pushes Sovereign Funds to Open to Outside Scrutiny
By Bob Davis, The Wall Street Journal
https://online.wsj.com/article/SB120399388652192707.html

The fear surrounding these funds pervaded headlines over the past few months. But instead of pushing through reactive legislation limiting capital flows and hampering free functioning capital markets, it appears our government is willing to ask for voluntary guidelines controlling transparency—a much better solution.

In fact, amid the hand-wringing over broken capital markets, there has been markedly little government intervention. Besides a politically motivated but relatively small US stimulus package in an election year and the UK's nationalizing of Northern Rock, politicians just haven't enacted sweeping regulatory measures. And we're glad of it.

These days, politicians talk big, scare us with protectionist or regulatory rhetoric, then rest on their laurels and put little into practice. We hope the current trend trusting markets to sort out their problems will continue. If history tells us anything, this is a good thing.