For those who have been speculating on how the government might bail out participants in the collapsing US subprime mortgage market, John Paul Koning writes that an unlikely savior has stepped forward: the Federal Home Loan Banks (FHLB), established in the midst of the Great Depression to provide a stable source of funding for member thrifts, otherwise known as savings & loan associations.
The FHLB system is hardly fair. Those with privileges â€” the member banks â€” get to borrow at rates below what the market would pay. Customers of these member banks are also privileged in that they can take out low-rate mortgages. This privilege is not free, though; it comes at the expense of all other taxpayers. Should the system experience some sort of setback, the implicit federal-government guarantee suggests that taxpayers will foot the bill â€” a select few bureaucrats, lenders, and house buyers benefiting at their expense.
The FHL Banks do not put themselves at risk by stepping in and lending to iffy members. They put FDIC at risk. And as we know from FSLIC’s demise in the 1980s, any failure of FDIC would probably be funded by taxpayers to the tune of billions. FULL ARTICLE