Arnold Kling  


Real Health Care Reform... Morning Commentary...

Here is a fact about the financial crisis that I had missed:

the Federal Home Loan banks supplied almost half the funding for two large private lenders, Countrywide and Indy Mac, that later failed.

This is from Allan H. Meltzer's chapter in a compendium of papers called The Road Ahead for the Fed.

The Federal Home Loan Banks, or FHLB's, were known as the "flubs." They were created in the 1930's to serve as a lender of last resort for the savings and loans, because the Fed would not do so. When the saving and loan industry fell apart in the 1980's and their regulation and deposit insurance was taken over by the FDIC around 1990, there was no longer any reason for the flubs to exist. Of course, this being the government, they were not shut down. Instead, looking for something to do, they decided to compete with Freddie and Fannie by playing around in the mortgage market.

As a taxpayer, you really have to resent losing money via the flubs. Just because they could not bear to get rid of some public sector workers, your Congress allowed these people to gamble away gobs of your money.

Good thing we have government to correct all the moral failures of the unfettered market.

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COMMENTS (3 to date)
Jeff writes:

Washington Mutual was another. This Forbes piece says they had ~$50 billion in funds borrowed from the FHLB's when they collapsed:

Matt writes:

I like these kind of posts that shed light on new information. Does anyone know of a good source, like a website, that shows which businesses and banks are in bed with the Fed Government and to what extent? I'm sure there are a ton of books out there that expose a few at a time, but I was kind of hoping for a timeline of the last 100 years that shows when major interventions occured.
Thanks for the help.

Alex J. Pollock writes:

And don't forget the $90 billion of funding the FHLBs supplied to Citibank.

What we have with all "Government-Sponsored Enterprises," including especially the FHLBs, Fannie, and Freddie is--as your concluding ironic remark suggests--nothing resembling the "unfettered market," but instead unfettered government intervention. In this case, it totals over $6 trillion. Odd that many people find this blindingly obvious point difficult to understand.

To analyze the bust, we must also consider the role of the FDIC, another intervention, just as was the infamous old FSLIC.

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