Bank Runs - Again?

According to BBC, the US housing crisis officially hits Europe. It is estimated that customers of England's Northern Rock bank have pulled out over 1 billion pounds on the first day alone, which is 5% of the bank's overall deposits. The run, which began on Friday, September 14, formed as a result of strained money markets over the summer. Over 250 of its loyal 1.5 million depositors lined outside, causing Northern Rock stocks to drop 30 some percent.

But what does this have to do with the United States?

Because of the US subprime crisis, American money markets have stopped lending to Northern Rock banks. Of course, money market investment is the banks primary source of monetary transaction and funds its substantial mortgage loans. As money flow within the bank slows to a trickle, customers become anxious about their deposits, which are currently backed by endorsements from the Bank of England.

Now, in the United States, the money market is strongly influenced by Fannie and Freddie, two of the nation’s biggest mortgage companies (uh oh). Freddie Mac and Fannie Mae are government sponsored enterprises who “help” loaners and homebuyers manage mortgages and are known for their corrupt methods of retaining GSE (Government Sponsored Enterprise) status. I've provided some information on these companies below:

* No direct competition.
* Receive annually 2 billion in benefits in corporate welfare
* Use benefits to fund a high-powered public relations and lobbying machines.

When the housing bubble collapsed, almost all of Freddie Mac and Fannie Mae's subprime bonds were virtually unaffected and were still ranked exceptionally high by June. However, the holdings of other companies were seriously crippled, leading analysts to believe that these government-chartered companies were protected from losses by (who else?) the government from loan failure.

Of course, Congress has already declared war against predatory loaning, so I wonder how FM and FM can remain in a positive light while still exploiting mortgage seekers.

-- Dr.Econ