Libertarians: Let Freddie Mac and Fannie Mae fail

Wow. From the Libertarian Party:

Washington, D.C. - "Let them fail," says Libertarian Party spokesperson Andrew Davis, referring to the mortgage institutions Freddie Mac and Fannie Mae, who the Bush administration has said it plans to rescue from financial collapse.

"Let them fail, and let them learn from their mistakes on their own dime," says Davis. "Bailing out these two institutions will only delay the inevitable outcome of any financial firm insulated from the market by government backing. The long run damage of continuing a policy of bailouts far exceeds any short term woes in letting the market consume failing institutions." ...

"It's like giving more candy to problem children," says Davis. "Lenders should recognize that there are repercussions for risky loans, and borrowers should realize that there are consequences for taking loans they can't repay. If it's financial collapse, or having your house foreclosed--so be it. It's bad economics to remove the incentives, even if they are negative, which encourage sensible and responsible decisions."

Now, before (or at least shortly after) you say "That's crazy and would lead to catastrophic economic consequences not seen since the Great Depression," consider this from The Financial Times:

The current structure for Fannie and Freddie is unsustainable. The GSEs are poorly regulated. They have given successive US governments an incentive to keep the housing market inflated. They socialise their risks and privatise their profits. Having saved the GSEs this weekend, policymakers should aim to bring about a decent burial for Freddie and Fannie.

They could be broken up into small pieces and privatised. A rump could be retained by the Treasury as a small counter-cyclical mortgage liquidity vehicle. The process might involve a period of nationalisation. This could mean the GSEs’ vast debts would be moved on to the public balance sheet. However, this is unimportant. It would be a cosmetic change; the government is already backing them; it is absurd that they are not now on the books.

Those guys aren't idiots. I, however, am. And even I want to know how we managed to get ourselves into a situation where two entities own or guarantee nearly half of the country's mortgages.

That sounds an awful lot like putting all your eggs in one basket.