Can government support for Fannie and Freddie worsen the financial crisis?

Question

There is such a thing as 'Moral Hazard'. When the US government guarantees to absorb any losses these two companies will have in the future. Then executives of these companies will likely start taking even bigger risks than they've been taking so far.

One thing that stops people from taking excessive risks in order to make profits is the possibility that they may loose their money. But when the government removes this risk. Then why would the executives of these companies be afraid to buy the worst sub-prime mortgages they can find?

Isn't this government guarantee an invitation for the mortgage industry to go back to careless lending and reckless trading of bad mortgages?

Answer 1

Government support? The government is beyond bankrupt and has no support to give. So this is just passing the losses on to the public. That's pretty much modern American for you, losses are socialized but profits are privatized. Any support for them is just digging the hole further, and it's pretty clear at this point that we can't dig much further. This is interesting reading on the topic:

http://www.alternet.org/workplace/91765/...

Answer 2

Net advisor beat me to another one...

But Net Advisor is right...mostly.  Except, the government will probably keep some kind of track record of what the are doing, and will not allow such a thing to happen (again).

And of course if the government is tracking them (most likely) and the government finds out about this, the executives will be in huge trouble...

Answer 3

Yes, and if the FED raises rates to save us 30 cents on gas, they will be hurting them self (tax payers) who will see greater foreclosures (on high mortgage rates) and then as the gov may guarantee those losses from banks would only hurt tax payers.

I didn't know we had a socialist banking system or socialist government. Didn't we learn anything from Karl Marx's poor  economic theories?