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Posted on Jul 19, 2008 in Uncategorized

Ben Bernanke: Corporate Welfare Czar?

Don’t get me wrong, I’m all for having a strong economy and the United States maintaining a global economic advantage. However, one thing that I am opposed to more than anything is the government stepping in and using tax-payer funds to help support companies that seem to be going under. Furthermore, I don’t think that any arm of the government, especially the Federal Reserve, should step in and give advantages to certain companies based on their positioning or weight in the market.

From AOL News:

News that the government plans to free up billions of dollars at Fannie Mae and Freddie Mac , a move that could help struggling homeowners, for a time helped quell some of the market’s fears. But it couldn’t stave off selling late in the session by investors who have seen big advances evaporate many times during the course of the credit markets crisis and decided to preserve some of their gains.

Some would argue that because both Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE’s) that the government should step in make sure they remain strong, without any risk to those who borrow money. However, despite the fact that it is a GSE, Fannie Mae is also a publicly traded company.

Furthermore, GSE’s are simply suppose to be companies that can make loans. These companies are not meant to be backed by the government, nor are they meant to receive any special treatment, or welfare from the United States Government, regardless of the condition of the economy.

Definition of Government Sponsored Enterprise from the Investopedia:

Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers and homeowners.

GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth recipients of corporate welfare.

Examples of GSEs include: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Farm Credit Bank and the Resolution Funding Corporation.

While Ben Bernanke might think that he is helping the economy by freeing up these dollars from lenders and slashing rates, I personally think that the troubles of the economy can work themselves out. The more we interfere with the market, the more investor fears are going to increase. Increased investor fears could eventually lead to a sell-off once more people come to realize that we are headed into a recession, if not there already.

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