My thoughts:
- This is better than nothing. I would have preferred an outright breakup and privatisation--which may still happen, someday down the road. But the government providing an implicit guarantee meant that Uncle Sam was taking on the risk without taking on the benefits.
- As usual, the regulators are locking the barn after the horse has been stolen. This should have happened months ago.
- There wasn't that much new information in the market to trigger the takeover--it's not as if capital requirements have plummeted. Rather, the existing regulatory requirements were found to provide inadequate capital in a broadly sinking market. We knew a long time ago that the current real estate market had made traditional capital adequacy requirements absurdly inadequate.
- Fannie and Freddie are the reason that the US has 30 year fixed mortgages; they can borrow capital at government rates. The ability to borrow money on these terms is probably not worth the distortion in the markets, and the constant regulatory tsuris of managing these behemoths. Better to borrow money on variable rates, like the rest of the world, than to have the mortgage market dominated by either the government, or two quasi-private companies.
- The claim that this represents the failure of markets is more than a tad silly. Fannie and Freddie weren't truly private companies, didn't act like truly private companies, and wouldn't have been allowed to so dominate the market if they had been. This is yet another failure of a government program.
Is there a hint of non-libertarian, regulation-hugging liberal here?
Serously, what would have happened had the companies tanked? Would it have been worse then the trillion dollars of additional debt we now owe? Would millions of mortgages have been called in and foreclosed? Or would the US be unable to borrow as readily from foreign lenders?
You'd have preferred break-up and privatisation now? Like, immediately? Because I'd think the problem with finding buyers for a lot of it would be hellish, inasmuch as i can tell, and that's the part you're worried about. My impression is that the idea is, nationalize, clean the stables as best you can and try to figure out what the damage is going to be, then carve up and privatise (or at least protect very hard the option of the next Treasury Department doing so). So you're (probably) getting carve-and-privatize, just, not now.
The claim that this represents the failure of markets is more than a tad silly. Fannie and Freddie weren't truly private companies, didn't act like truly private companies, and wouldn't have been allowed to so dominate the market if they had been. This is yet another failure of a government program.
Really? Did you see how much they spent on lobbying? It is a failure of markets. The CEO's acted like they were in the private markets with their buying all sorts of crappy securities. They had very little in the way of risk management controls. It was also a failure of Republican government. Republicans don't believe in any regulations, and this is what they get for it.
I think that Paulson and Bernanke will be viewed as the two bright spots of all Bush appointments. At this late stage in the Bush presidency his successor will have to deal with Freddie/Fannie. McCain's and Obama's economic team should be getting more attention.
What amazes me is how many die-hard small government conservatives seem to be supporting this deal. Even Larry Kudlow, if I'm remembering correctly, was supportive. I think it goes to show the depth of the problem.
Freddie and Fannie acted as you'd expect any organization that is protected on its downside to act. They took foolish risks because they only had upside exposure.
As an example, it doesn't invalidate markets. But neither nor does it invalidate government programs. The most it shows is that, unlike chocolate and peanut butter, privatized profits and socialized losses are not two great tastes that taste great as one.
"Really? Did you see how much they spent on lobbying? It is a failure of markets."
That makes no sense.
The claim that Republicans and the Bush Administration opposed regulation of Fannie Mae and Freddie Mac is the most absurd, upside-down inversion of the truth I've heard in a long time.
I certainly grant that there are good-faith reasons why someone would want quasi-public mortgage institutions to give people breaks to encourage "affordable housing," and that there were reasonable points of view thinking that the risk models were off and overestimating the chance of catastrophe, resulting in too high mortgage charges. But for those reasons, Democrats like Barney Frank (and some Republicans, like the retired Rep. Oxley) supported Fannie and Freddie in their lobbying.
Unfortunately, every time I attempt to post a comment with a link showing, e.g., the Bush Administration fighting in 2003 to regulate Fannie and Freddie more and Barney Frank and others preventing regulation, the moderation system intercepts the attempt.
You said: "I would have preferred an outright breakup and privatisation--which may still happen, someday down the road."
So you agree with Pailin.
djtuchler
I still think our overriding regulatory act should be restricting any financial institution (public, private, quasi) from becoming "too big to fail" and breaking up any that already are.
I'm sick and tired of taxpayer funded bailouts and being held hostage to the "too big to fail" line.
Rememember how we got into this mess: we wanted to help people own their own home, and "people" was expanded to include everyone, those who needed no help, those who could pay cash, and those who couldn't afford it. Our next president will either be a helper-in-chief or a diluted version therof. The country has decided that individuals should not be subject to a free housing market. Some wasteful program is needed. The easiest solution is to keep Fannie and Fred, but without the last management team.
Fannie and Freddie are another great example of how in America, it's free markets for the poor, and socialism for the rich.
" Better to borrow money on variable rates, like the rest of the world, than to have the mortgage market dominated by either the government, or two quasi-private companies."
I take your point, but this is one thing I love about having a mortgage in the US, and the thing that pisses me off the most about the housing crash. There were awesome, cheap, fixed rate mortgages availible, yet morons chose to buy more house than they could afford using ARMs, teaser-rate mortgages, etc. Homebuyers in Canada and Europe would give their left arm to get the sorts of mortages routinely offered to Americans. This is why I have absolutely no sympathy for the gluttons who originated the failing mortgages and the pigs who borrower the money with no plan (beyond mere speculation) for how to pay it back. Screw them all -and keep your hands out of my pocket. Now both sides of that douchebag coin are telling me that we have to bail them out or the value of my modest and afordable home will fall even further. Garrhgg!
Oh, and let's not forget the lefties and other community activist types who inveighed against "re-lining" - and used Fan/Fred as a means of social engineering, which only required them to completely toss credit standards out the window.
"Really? Did you see how much they spent on lobbying? It is a failure of markets."
Geez!! I cut and pasted the wrong thing. Take a chill already!!
Oh, and let's not forget the lefties and other community activist types who inveighed against "re-lining" - and used Fan/Fred as a means of social engineering, which only required them to completely toss credit standards out the window.
What in heck are you talking about? "re-lining"?
I think he means red-lining.
Holdfast,
I have to agree with you. During the housing boom, I stayed in the same 1,800 sq ft home that I had bought in 2001, and while I did refinance a lower rate, it was a fixed 20-yr rate, which kept my payments at the same level, but reduced the number of years to pay it off.
Yeah, I'd like a bigger home, but until recently, I didn't have the money to comfortably make the payments. I acted responsibly (or responsible enough), and I'm going to help bail out people who weren't.
Do I have a solution? No, I'm not that smart, but I do understand carrots and sticks, and I'd like to see some stick administered.
Ta-Nehisi won't let us ask... what's happening with Andrew?
I agree entirely - it's a failure of government, not of markets.
As a result of this bailout every industry with problems ,(self-inflicted I might add), will come looking for a government handout. Rewarding stupidity rather than letting the markets do their job results in dumber and dumber decision making with taxpayers taking on the risk.
It looks like we've entered the age of moral hazard run wild.
Blaming this on the Republicans is hard even for Dr. Krugman. I vaguely recall that five or six years ago, amazingly, the Bushies actually proposed putting some kind of risk management oversight into place for F&F. In fact, in an amazing display of stepping back Presidential power I think they even wanted to get rid of their ability to appoint the board, making the thing more like a private entity (which in retrospect should've tipped us off that bad stuff was up). The Democrats saw it as a theoretical first step towards assaulting the ability of the poor to get housing loans and killed it good and dead. If the Republicans aren't totally brain-dead yet they will start pounding the Democrats on this thing (meaning, they won't).
This ain't a terrible case of moral hazard, Mike: for one thing it sounds like there's going to be some really, really unhappy shareholders out there. OK, the _customers_ didn't get reamed out, but the costs of that would've been terrible.
The losses will amount to large multiples of all the private profit ever generated by both GSEs. There are no benefits that will accrue to the government. What is going to happen, and Barney Frank has already made this 100% crystal clear, is that the two will be used to an even greater extent to subsidize home buying/building. The losses will continue from here going forward, but will simply be line-items in the federal budget.
From a purely impartial viewpoint, I would have to advise all upside down mortgage payers to stop paying today and force either a renegotiated mortgage on much better terms, or dare them to foreclose. I am betting the government will let you steal the house for years- maybe until the last resident actually dies.
People like me, that were prudent home buyers, have too much equity to game the system, and are now expected to help pay for everyone else.
Re: No fixed rate 30 year mortgages outside the USA? Really? Megan, can you give some data?
Even if this is true does it matter? Its not as if everyone in the rest of the world rents, or lives in a shack. Look at Australia, Canada, Europe, for example. Moreover, the rest of the world manages to do it without mortgage interest deduction (IMHO, a counterproductive subsidy). How do they do it?
Re: No fixed rate 30 year mortgages outside the USA? Really? Megan, can you give some data?
THis is correct. In Canada, for example, the best you get are what would be a hybrid ARM here in the US. They have apparently two types of these, one in which the terms in the floating period are specified in advance: this many basis points above LIBOR, e.g. and others in which the bank has an option to set the floating rate (borrower has the option to call)
India, the other market I am somewhat acquainted with, has similar mortgages.
Fixed Rate amortizing mortgages were a financial innovation that was enabled by the agencies, back when they were really government agencies.
Serf:
thanks, can you clarify re India: same as Canada or same as USA (I assume Canada).
I am curious how people in the rest of the industrialized world get to own a home without it being linked in some way to government debt or other government subsidy.
If borrowing costs are higher are houses more "affordable" (purchase price relative to average wages)? This cant be entirely true, with large increases in property prices in UK, Spain, Australia.
"There wasn't that much new information in the market to trigger the takeover--it's not as if capital requirements have plummeted. Rather, the existing regulatory requirements were found to provide inadequate capital in a broadly sinking market. We knew a long time ago that the current real estate market had made traditional capital adequacy requirements absurdly inadequate."
Megan -
The new information was the stock prices re-entering free-fall in late July (e.g., Fannie going from $15 on 7/23 to $5 on 8/22). That development was a reversal from the brief upward trend following the July announcement of Treasury's new authority. The rock-bottom pricing was a signal that the markets weren't sold on the GSE's ability to stabilize (and raise capital) on their own.
Fannie and Freddie require steady access to debt markets, and the perception that they couldn't solve their own problems was increasingly putting that access - and, therefore, their survival - at risk.
Today's market for Lehman stock is basically declaring that it, too, will need a bailout.
Drip, drip, drip.....
SJE:
yes, I mean India is more similar to Canada.
Also, as someone else has pointed out, there are no "non-recourse" loans. Also, (in India) debt collection tactics tend to, how shd I say, involve a larger measure of "pursuation at close quarters". There was a furor, leading to a High Court case (I don't remember if it went up to the Supreme Court, or one of the state High Courts) involving a now troubled US bank and its hiring of goons to collect delinquent car loans.
I am curious how people in the rest of the industrialized world get to own a home without it being linked in some way to government debt or other government subsidy.
Britain, Canada and Australia ALL have modestly higher rates of home ownership than the US, so America's own brand of government housing market intervention doesn't seem to give us any "better" results than other rich countries -- none of which pursue the type of massive-in-scale, taxpayer-financed market distortions that are national policy in the United States.
In much of the US it is very difficult -- mostly because of local government land use restrictions -- to build significant amounts of new housing. Pretty clearly any government subsidy for the housing sector (this applies to the M.I.D., too, I'd reckon) will at least partly be reflected in larger and fancier houses with higher price tags -- rather than higher rates of home ownership.
But what I really want to know is, why is the usually smart and sane Barney Frank such a shill for the demonstrably disastrous set of policies governing F&F.
Jasper: thanks for that. Re Barney Frank et al, F&F have been among the biggest donors not only to politicians but to various "worthy" causes, and have been able to sell themselves as good guys all around: helping people buy houses, helping charities do good works, "helping" politicians get elected.
Barney Frank et al, F&F have been among the biggest donors not only to politicians but to various "worthy" causes, and have been able to sell themselves as good guys...
Well, maybe, but Frank himself could spend eighty-five cents on his reelection campaigns and still beat his semiannual Republican opponent 70-30. I rather suspect lots of politicians on both sides of the aisle realize that many Americans view 30-year fixed mortgages with low down payments and low interest rates as a quasi-constitutional right -- akin to the mortgage interest deduction or Social Security. In other words something that's hugely popular with voters, and something they don't want to be blamed for getting rid of. If all of us are slightly poorer as a result, so be it.
It is especially galling to think of the ways in which markets might have addressed various consumer demands in the absence of unfair competition from F & F. The sooner they cease to exist, the better.
I'll believe their shareholders are diluted when I see it. The deal _allows_ Treasury to acquire 80% of the equity, but this hasn't happened yet. They won't require cash beyond refinancing existing unless their losses amount to an actual cash shortfall, and even then they can borrow behind the government guarantee. Diluting the shareholders would further embarrass the whole idea and would thus be unpopular with Rep. Franks and Sen. Schumer.
And if the shareholders aren't diluted, they're getting the benefit of an unlimited put on Treasury for the cost of $1bn in 10% preferred. That's a good deal.
And I don't buy this GSEs enable the 30 year fixed business. Didn't that structure predate the GSEs, and wasn't it prevalent long before they achieved their current market share?
I am one of those evil, libertarian, neo-liberals, and even I think there is a market failure operating here.
The failure is that it is too easy to set up a business model that ignores very-low-probability, very-high-impact events, and not set aside capital to handle those events. Indeed, a business that tries to will likely be out-competed by a rival that doesn't before such events come to pass. When the events do eventualy come to pass, the customers who benefited from the too-low prices are long gone, the executes who set aside insufficient reserves are long retires, and the stockholders who hired those executes have long since sold. Who gets hit is essentially random.
This happened to FRE and FNM because their guarntor business models weren't able to withstand higher default rates and borrowing costs. Those guarantor business models brought them higher profits and homeowners lower mortgage rates than they should have had if their business models had provisioned for extreme events. And now the (generally poorer) non-homeowning taxpayers get to pay the difference that should have been saved from the mortgage payments of (generally richer) homeowners that should have been higher.
The reason I'm still an evil, liberarian, neo-liberal in the face of this clear market failure is that failures like this exist in government-run enterprises to an even worse degree. Witness the many politicians who profited in the 1990s from handing out outsize tax receipts and pension fund surpluses like candy. Witness politicians like Frank and Dodd who, in the face of the the GSE crisis, are calling for even bigger government mortgage guarantees targeted at even lower quality borowers.
What I hope to see come out of this is a move to a mortgage market financed by non-guaranteed MBSs, like much of the rest of the developed world has: homebuyers pay higher rates, financers accept default risk, and the market is not dominated by a small number of players who have achieved regulatory capture. But I'm not holding my breath.
"Really? Did you see how much they spent on lobbying? It is a failure of markets."
Didn't make any sense to me either....wonder if I could do Megan's job? Joe, you must try harder.
"Fannie and Freddie are another great example of how in America, it's free markets for the poor, and socialism for the rich."
Huh? Guess I'm batting 1000 today... Wonder if Megan got it?
Now this made sense:
"This is why I have absolutely no sympathy for the gluttons who originated the failing mortgages and the pigs who borrower the money with no plan (beyond mere speculation) for how to pay it back. Screw them all -and keep your hands out of my pocket. Now both sides of that douchebag coin are telling me that we have to bail them out or the value of my modest and afordable home will fall even further."
To the pigs and gluttons, I think I'd add the lame-brained politicians who thought affirmative action lending was a good idea. Dubya, you listening? I like ya, guy, but that was a major blunder.
Never fear; now that the gov't has stepped in and infused hundreds of billions of our dollars, it will be business as usual; Barney Frank has said so. Luckily I live in a tent and have a spare.
Paulson and Bernanke may be shining stars, but I get a strong whiff of "OMIGOSH! WHATdoWEdoNOW?" from this debacle....probably instigated by some calls from Asia. Back in March, the dynamic duo was hoping Fan and Fed could take up slack in the mortgage market and pull us out of the subprime mess. If they're right now, they were completely clueless then.
Ahhh, what does it matter?
Although the libertarian in me thinks the government should just but out of this, one thing that struck me is how much of a good deal F&F have been overall.
Economists suggest that the implicit government guarantee provides between 30 and 50 basis points of rate relief to borrowers. With a total amount of F&F underwritten mortgages at around $5T and a bailout estimated at $200B, we're looking at a cost of about 4% of the total amount underwritten.
Given the 30-50 bp discount that consumers see, we could do a bailout like this every 8-12 years and still break even.
One wonders how many times these items will be hashed and rehashed before the core issue surfaces.
the existing regulatory requirements were found to provide inadequate capital in a broadly sinking market.
While but one isolated comment, this is out of phase with reality. Existing monetary policy was found to provide excess mortgage capital, for crying out loud, as the result of a Fed operated out of touch with reality. Which eventually precipitated a broadly "sinking" market, as it must, where the crashing side of the curve hasn't even reached the normal price floor.
This is vastly more serious than, as an early commenter alluded, regulation advocates admit. This isn't about regulation. This is about monetary policy and a fiat currency.
Dig deeper.
Come on, Megan. You're completely right to absolve markets, but you're so incomplete so often about the global system it's frightening.
Economists suggest that the implicit government guarantee provides between 30 and 50 basis points of rate relief to borrowers...Given the 30-50 bp discount that consumers see, we could do a bailout like this every 8-12 years and still break even.
You couldn't possibly make a statement like that unless you've done analysis on capital misallocation. Have you done such an analysis? I strongly suspect there's a price to be paid for those 30-50 bp of relief that most borrowers otherwise wouldn't get, and that price is less prosperity. I vaguely recall a professor years ago droning on about the non-existence of free lunches...
GOVERNMENT TOOK THEM OVER AND NATIONALIZED THEM. I have heard so many free market capitalists-- say, 'yeah, finally'.. um, they've been NATIONALIZED. Anyone get that?
And, Paulson took this company under and didn't pay a dime to any shareholders. It was a functioning company, but to please the 'yeah, finally' crowd he created a panic that didn't exist.
His justification:
Look, I took FNM and FRE into TOTAL GOVERNMENT CONTROL, but don't worry folks, I didn't pay the shareholders anything for it. So, we got it, and don't worry no one had to pay for it.
So...
You got it folks. You got FNM and FRE on the government dole.. without paying a dime.
Feel better now?
Next time, if Paulson doesn't have the money to buy the common and preferred stock at market rate (ie. the taxpayers don't want to pay to own this organization) than DONT DO IT.
The biggest failure of partisan thought these days, aside perhaps from half the country wanting to elect a Messiah, is the ostensibly conservative "right" hoorahing the Fed...and actually praising that old incompetent Greenspan and now Helicopter Bernake!
What harder slap of nationalized, socialist reality to you guys need before you realize that what is happening precisely this week is utterly antithetical to Jeffersonian values?
http://www.youtube.com/watch?v=vWa9AfkjwoY
Jasper's comment that 30-50bp discount induces capital misallocation seems spot on. The problem is that with government subsidies via the GSEs, MID etc, you have allocation of capital to housing instead of productive investments like companies etc. The results:
1. Overinvestment in housing, which increases the cost of a house, thereby counteracting the subsidy of interest rates. No net benefit to consumers.
2. Underinvestment in productive capital. We currently have a need for capital investment in everything from companies to infrastructure, and therefore must look to foreign capital, which might not always be as good for US interests.
Megan commented on the folly of this when she said that "investing in your house" doesnt make your house any "housier" unlike the average stock investment. Consumer loses.
3. Too much of the capital liquidity in the US is tied to housing (related to 1 and 2). So, when housing prices fall, you have more damage to the rest of the economy than you would without the subsidies. Consumer loses.
All in all, government programs that were enacted to help consumers has had no net benefit on one aspect, and harmed the broader economy in two other ways.
Jasper's comment that 30-50bp discount induces capital misallocation seems spot on. The problem is that with government subsidies via the GSEs, MID etc, you have allocation of capital to housing instead of productive investments like companies etc.
I'm no economist, and no, I haven't done the the requisite capital misallocation analysis Jasper suggests. OTOH, it seems to me that capital flows are pretty leaky so the costs of any misallocation would be spread across the globe, while the US gets to be the sole beneficiary.
That said, I think SJE makes a very good point about the risks of using foreign capital to finance your local housing stock. I would have loved to listen in on some of the calls between Paulson and his sovereign wealth fund buddies this weekend.
Once again---government policies are implemented that distort the market, and when they end up crashing and burning the usual gang of idiots starts raving about the failures and inadequacies of capitalism and free markets. I can't remember precisely, but I think it comes from the Sufi's, that there are certain questions, which if asked, demonstrate conclusively that the questioner is incapable of understanding the answer. The paleo-liberals who cling to the "progressive" ideas of the 19th century seem to fit such a description. They remember everything and learn nothing. The idea that the solution to an economic problem does not and should not involve governmental guidance or interference is completely beyond their comprehension. Its like trying to convince the Pope that God does not exist.
>>"This is yet another failure of a government program."
Wrong. It's a failure of the ethics of those in the banking and mortgage businesses. That's what changed.
It's a failure of the ethics of those in the banking and mortgage businesses. That's what changed.
"That" hasn't changed at all. Human psychology has been hardwired by a couple of billion years of evolution. Figure out a way to change "that" and you've got a prayer at getting humans to behave more ethically. Fail to figure out a way to change "that" and you'd best implement a system that is inherently capable of avoiding crises brought on by poor ethics. I believe such a system would be characterized by: A) Lots of smaller players instead of a couple of huge ones (so a problem in any one institution doesn't adversely affect the entire economy); and, B) Minimal risk to taxpayers.
I won't disagree that humans are often greedy bastards. But, it's obvious that something changed to caused the housing collapse. it happened this year, not in 1998 or 1988 or 1978. To my eye, what changed was the appearance and the widespread acceptance of ill-advised loan structures. Ethical, or at least non-ignorant, institutions should have refused to play that game. Ethical, or at least non-ignorant and non-colluding government officials would have adequately performed their regulatory duties.
I believe that, in any society, individuals with shared interests and objectives will join forces in an attempt to control events to their advantage. So, I specifically do not believe that "lots of smaller players" would present the solution you suggest because, invariably, some of those smaller players would ally with others to create a few large and powerful institutions that would dominate political and economic life to their advanatge.
The history of humanity is largely the history of these power elites and the struggle of 'smaller players" to protect and assert their own interests and rights against them. In a democratic society, the government must stand between those few power elites and the people and ensure that the rights and interests of the people are respected.
I believe that, in any society, individuals with shared interests and objectives will join forces in an attempt to control events to their advantage.
Me too.
So, I specifically do not believe that "lots of smaller players" would present the solution you suggest because, invariably, some of those smaller players would ally with others to create a few large and powerful institutions that would dominate political and economic life to their advanatge.
I don't know why you would use the word "invariably" in this instance. It's obviously not infeasible for the government to prevent an unsafe concentration of mortgage lending via anti-trust laws or comparable legislation. Moreover, the typical transaction (multiplied by several million) that got us into this mess doesn't depend on "alliances" between different firms. All it takes is a single ethically-challenged mortgage banker combined with a single ethically challenged (or naive and poorly educated) borrower -- and both of them responding to market forces.
The history of humanity is largely the history of these power elites and the struggle of 'smaller players" to protect and assert their own interests and rights against them.
Greed, malfeasance, imprudence, irrational exuberance poor ethics and sundry other failings are all predictable parts of the human condition. What I'm saying is: let's set things up so that when the predictable, inevitable happens (human greed and or insufficiently perfect governmental efforts to guard against said greed) the economy as a whole doesn't suffer, and the taxpayers aren't left with a huge bill.
Finally, given the vast scale of the economic pain flowing from our current arrangements, why should our society pin its hopes on improving the efficacy of the regulation of Fannie/Freddie rather than (eventually) getting rid of them or selling them off? Why in other words, do the country's taxpayers need to be in the mortgage business in the first place?
This is yet another failure of a government program.
Well, no. This is the failure of running a government program like a private corporation. You know, like Republicans are always saying is such a good idea. But like we saw with Walter Reed, any time you're privatizing the profits and socializing the risk, things go completely to shit.
>>" ...why should our society pin its hopes on improving the efficacy of the regulation of Fannie/Freddie rather than (eventually) getting rid of them or selling them off? Why in other words, do the country's taxpayers need to be in the mortgage business in the first place?"
The country's taxpayers weren't in the mortgage business. Now they are because their elected representatives decided that the collapse of Fannie/Freddie would produce an economic disaster and they aren't willing to take the political hit. I don't agree with those who argue that we should just let them collapse and allow the market do its thing. The public good should never be sacrificed to the dogmas of ideology. From my point of view, adding to the federal debt is no more onerous for taxpayers than the price taxpayers would have to pay if the feds had stayed out.
The country's taxpayers weren't in the mortgage business.
Sure they were. Taxpayer cash wasn't involved until now. But if you're participating in transactions that create debts you'll have to pay back, you're very much in the (mortgage) business whether you like it or not or whether you know it or not. Or, to put it another way, taxpayers have very gradually been getting deeper and deeper in the mortgage business over the years, but nobody talked about it much and most people weren't aware of it at all.
Now they are because their elected representatives decided that the collapse of Fannie/Freddie would produce an economic disaster and they aren't willing to take the political hit.
Well, even a cynical person like me things it more than just politics involved. The economic disaster you refer to would cause massive pain to millions of people.
I don't agree with those who argue that we should just let them collapse and allow the market do its thing.
Me neither. Hardly anybody's arguing that. The vast majority of people who want radical reform of the F&F system want said reform only after (3-5 years?) the necessary bailout has enabled us to get past the crisis stage. No reasonable person of any political stripe wants to relive the 1930s.
The public good should never be sacrificed to the dogmas of ideology.
Which is exactly why we should jettison the highly dysfunctional F&F system as soon as possible. Also, I repeat the question I asked at 4:15pm that you curiously didn't respond to: Why exactly do the country's taxpayers need to be in the mortgage business in the first place? Or, if you object to the language, how about, why do the country's taxpayers need to be in the business of guaranteeing mortgage lending in the first place?
Jasper, I didn't avoid answering your question. I can't think of a compelling reason why taxpayers need to guarantee mortgages. I also can't think of a reason why they should not.
Given the choice, I'd have more confidence in a government-backed and government-controlled system than I would a strictly private system. I don't believe the beneficial aspects of a free market system exist when the market is subject to control by a few large institutions. If we're not going to have a free market, I'd rather let the feds pull the strings than corporate suits.
But, it's obvious that something changed to caused the housing collapse. it happened this year, not in 1998 or 1988 or 1978. To my eye, what changed was the appearance and the widespread acceptance of ill-advised loan structures.
Ethics haven't changed - incentives changed. Policy/regulation was modified to create incentives - or even force - the generation of loans for higher risk (ie low income) house buyers.
Blaming this on a sudden shift in ethics or morality turns a blind eye to the role that government has played in this situation.
You're right Chris. I did point to lax regulation. However, lax ethics -- greed and wishful thinking -- certainly blinded a lot of people to the unsustainability of their behavior. After all, some firms didn't join in the fun because they correctly saw where things were going.
I can't think of a compelling reason why taxpayers need to guarantee mortgages. I also can't think of a reason why they should not.
justcorbly: You really can't? How about the reason that an economy characterized by private markets works much more efficiently, and is more conducive to prosperity and wealth creation, than a command economy? This isn't to say one can't make a plausible case for government intervention in certain areas where private markets can't satisfactorily meet a societal goal. National defense, infrastructure, basic research, education, and pensions and healthcare for old people are all challenges our society has deemed incapable of being met save with the large scale participation of the government. But there's simply no case for coming to the same conclusion with respect to mortgage lending.
Given the choice, I'd have more confidence in a government-backed and government-controlled system than I would a strictly private system.
Right. I feel the same way about government-produced iPhones and cable TV dramas. I long for the days when Congress nationalizes Apple and HBO.
I don't believe the beneficial aspects of a free market system exist when the market is subject to control by a few large institutions.
Tautological argument. We don't have a free market in mortgage loans and guarantees. We have -- and have had for some time now -- a market utterly dependent on two gargantuan, corporatist conduits of moral hazard and taxpayer money.
If we're not going to have a free market...
Who says we're not going to?
I don't think we would lose the fixed rate mortgages if we got rid of FN/FR. While commoditization does make modeling prepayments easier and the GSEs were critical in creating fixed rate mortgages, at this point we have the technology and market depth to handle the prepay optionality embedded in fixed rate mortgages with or without the GSEs. By definition FN/FR don't create jumbo loans, but 30yr fixed rate mortgages are given out all the time.