On Wednesday, the Federal Government filed suit against Bank of America, alledging fraud in the sale of thousands of mortgages to Fannie Mae and Freddie Mac. According to the suit, this exchange ”[caused] taxpayers more than $1 billion of losses.” As if more proof is necessary, this case highlights just how destructive the state can be.
Whether Bank of America engaged in any fraud with these deals, who knows? They probably did. But regardless, these purchases only led to losses at Fannie and Freddie because the Feds are involved so heavily in the housing and mortage industry. Had the federal government never intervened in the first place, it would have been Bank of America and its shareholders that absorbed these losses.
It should also be noted that if the federal government wasn’t in the business of buying massive packages of mortgage-backed securities, and the central bank wasn’t inflating bubbles with cheap credit, these losses would surely never have happened. Virtually no private business subject to market demands and without a lifeline from the federal government would have made these loans in the first place. It’s only because of the moral hazard of implicit bailouts and corporate welfare that large institutions can engage in such risky practices.
Furthermore, it should also be noted that the $1 billion was lost as soon as it left the hands of the taxpayers, not when Fannie Mae and Freddie Mac saw the value of their portfolios drop. Once the feds begin “investing” our money it’s already lost to its original owners. Any losses will be covered through more taxation, borrowing, or money creation; and any gains will go to the treasury. It’s not as if when the feds turn a profit we all get dividend checks in the mail.