September 09, 2008
WSJ finds someone to blame.... be skeptical, and tell the WSJ to grow up.
JPM points to the tabloid for serious teenagers, the Wall Street Journal, who finds someone to blame for Fannie Mae and Freddie Mac:
There you have the Fannie Mae problem in profile. Mr. Frank wants you to pick up the tab for its failures, while he still vows to block a reform that might prevent the same disaster from happening again.
At least the Massachusetts Democrat is consistent. His record is close to perfect as a stalwart opponent of reforming the two companies, going back more than a decade. The first concerted push to rein in Fan and Fred in Congress came as far back as 1992, and Mr. Frank was right there, standing athwart. But things really picked up this decade, and Barney was there at every turn. Let's roll the audiotape:
In 2000, then-Rep. Richard Baker proposed a bill to reform Fannie and Freddie's oversight. Mr. Frank dismissed the idea, saying concerns about the two were "overblown" and that there was "no federal liability there whatsoever."
Read the whole thing, it is hilarious or sad, depending on whether you have to pick up the check. (For the latter, consider that $200bn leveraging that $5.4 trillion of expanded credit is actually a bargain!).
Yet, blaming Mr Frank is just childish. The WSJ writes as if it were Peter Pan:
Mr. Frank has had many accomplices from both parties in his protection of Fan and Fred. But he was and is among the most vociferous and powerful. In any other area of American life, this track record would get a man run out of town.
A Congressman is just a hired gun. Perhaps suspecting that adults lurk nearby, it is admitted that, if it wasn't Mr Frank, it would be someone else. Or something else. Running him out of town might make the lost boys feel better, but it changes nothing.
The core failure in the mess is as I described yesterday, and if you want to avoid collapses of this size, then there is one solution: "don't do that!" That being, in a nutshell, interfere in a market. Sometimes known as "small government" or whatever passes for the opposite of socialism these days (now that choosing capitalism is no longer trendy).
The US government has, like all other socialist enterprises, fallen for the old trick of interfering in a market, because (a) it can, and (b) it's always easy to convince people you have a good idea, if you pay them... Of course, it's not a good idea, and the real truth is the governments do not know how the markets work, almost by definition: that's why we have markets, and if government workers knew how they worked, they would get in them and make money like everyone else.
If the population of the USA decides to run a socialist housing market, then so be it. And, there seems little doubt that this is what the population of the USA wants, as the only man who wouldn't write the check, Ron Paul, got nowhere in the recent Presidential nominations.
It's your choice! Pass the hat around, and write up another mortgage application.
Posted by iang at September 9, 2008 06:37 AM
On one side is the "moral hazard" argument ... that if extremely risky behavior is rewarded by bailouts ... then they never learn responsible behavior ("grow-up"?) and the bad behavior continues to gets worse (some comments that after the financial industry bailouts, there looms the US automobile industry bailouts).
On the other side there are references and hand-wringing that large GSE holders were pension funds and other countries (soveriegn funds).
However, there was interview with Buffett a couple weeks ago where he mentioned having been Freddie's largest shareholder in 2000/2001 ... but got out of GSEs because of their accounting methods (prudent adults look behind the curtain)
All during this period there were comments that nothing would be done about GSEs (and their related accounting practices) because they had one of the most powerful lobbies in Washington.
There have been a number of programs and articles about extremely corrupt congress (seemingly symbiotic relationship between congress and the lobbies).
If you fall for the WSJ blaming Barney Frank (Look he is a Democrat! And he's Gay!!!!) for the failure to regulate in order to prevent fraud in applications, exploitive financing that causes mortgage defaults, and transparency in the market I have a lovely bridge to sell you.
Even the most extreme libertarian knows markets requires rules, like don't lie on mortgage applications or don't by mortgage applications which applicants have never seen. Or don't make exploitive loans that the subject cannot replay in order to sell them and leave two people with debt. (Advocating no rules moves you into anarchist, by definition.)
It is true people do not know everything. If we ran health care the way you would run the markets the doctors could give us powdered sugar in capsules. Or I could sell cases of powered corn starch in pill form and call it Tylenol. We could then have home labs where we test everything the dr offers and investigate the reliability.
Not even Adam Smith believed markets were magic and people had infinite attention spans. Freddie Mac and Fannie Mae and Katrina are all real world examples of applications of Chicago School theories to the real world. You should look behind your own veil of chosen ignorance and ideology.
You won! The government has been owned by the Chicago School and republicans for eight years. These are your policies playing out, not the policies of liberals. Be a grown up indeed, and try to learn from the failures of the ideology you so embrace.
regarding graphs of long-term home market prices:
I would contend that the current home price correction is more akin to the stock market crash of '29 ... than related to past home-owner market activity (i.e. the statistics merge and obfuscate the two different activities).
The scenario is that the legislative, regulatory, and policy changes in the 90s, allowed the speculators to leverage unregulated triple-A rated toxic CDOs (for funds) and descend on the home-owner market and treat it (the home-owner market) like the 1920s unregulated stock market. The current bubble & correction looks more like speculation fervor than past home-owner activity.
An analogy is the cancerous cells have been impersonating healthy tissue. Legislative, regulatory and policy changes in the 90s effectively enabled the disease and prevented diagnoses before it reached a very advanced stage (delaying remedial treatment). With the cancerous cells so permeating the healthy tissue ... it is taking extreme measures to try and eradicate the disease ... and along the way there is extensive collateral damage in the healthy tissue. In fact, the cancerous cells appear to be trying to take advantage of the ambiguity and promote obfuscation.
the issue is that the speculation activity in the home market was allowed to become a significant part of all activity and there is now quite a bit of obfuscation and ambiguity regarding the significant speculation activity overlaying the traditional home buyer activity (and the reasons for the correction).
part of that legislative, regulatory and policy changes in the 90s included the repeal of Glass-Steagall ... which had been passed in the wake of the '29 crash ... with the objective of keeping unregulated, risky investment banking activity separate from the safety&soundness of regulated banking.
long-winded, decade old post mentioning some of the issues
recent post suggesting that price correction might reset to the pre-speculation bubble
1. Your SSL cert is hosed - ironic, no?
2. Your syndication feed is hosed, it's sending out your posts as just one long, mashed-up paragraph.
Would you be so kind as to fix these issues? I really enjoy reading your insights, and resolving these issues would make doing so a lot easier for me and for the rest of your readership.
Thanks, and let me offer you another insight:
welcome to CAcert's certificates. There is nothing wrong with it. What is going on here is that your browser is telling you that it is "hosed" ... contrast that with me telling you that there is nothing wrong with the certificate.
(Between those two viewpoints lies a black hole of debate :)
The syndication / RSS: ok, you are the second person to tell me that. probably it just needs an update, as it looks like syndication standards have changed over time.... Oh dear. That is a lot of work. I'll look at it, but I don't know when.
CBS has recent news item about GSE mess and powerful friends.
The accounting methods freddie cooked the books inflating profit by $10b to boost executive bonus ... and in 2004 was fined $400m. The head executive was replaced ... but allowed to keep $60m (of the $90m). The current two top executives of freddie & fannie are out ... but keep $30m. At one point freddie had more lobbyists working for them than employees.
where was SOX in all this?