Moral Dilemmas for Fannie and Freddie

The US government's takeover of Fannie Mae and Freddie Mac constitutes a huge bailout of these institutions' creditors, whose losses have ballooned as house prices continue to plummet. It may seem immoral to stick innocent taxpayers with the bill, but refusing to bail out investors may be even less moral.

NEW HAVEN – The United States government’s takeover of mortgage giants Fannie Mae and Freddie Mac constitutes a huge bailout of these institutions’ creditors, whose losses have ballooned as house prices continue to plummet. With the government now fully guaranteeing Fannie’s and Freddie’s debts, American taxpayers will have to pay for everything not covered by their creditors’ inadequate capital.

Why is this bailout happening in the world’s most avowedly capitalist country? Don’t venerable capitalist principles imply that anyone who believed in the real estate bubble and who invested in Fannie and Freddie must accept their losses? Is it fair that innocent taxpayers must now pay for their mistakes?

The answers to such questions would be obvious if the moral issues in the current financial crisis were clear-cut. But they are not.

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