Thursday, February 17, 2011

The Death of Freddie and Fannie?

Believe it or not, a bi-partisan consensus may be forming that will finally, once and for all, sell off the vampiric monsters known as Fannie Mae and Freddie Mac.

The signs are encouraging, but statist projects die hard...
One compromise described in drafts of the administration’s proposal would reduce the government’s role to a last line of defense for the mortgage market. A version of this idea has been advocated by David S. Scharfstein, a finance professor at Harvard who previously worked as an adviser to Mr. Geithner.

The core of Mr. Scharfstein’s proposal is to create a new government-owned corporation for the sole purpose of providing guarantees to mortgage investors. During normal times, the insurer would guarantee no more than 10 percent of mortgages, but in times of crisis, the government could raise that cap, offering guarantees to a broader range of investors so that money continues to flow into the mortgage market and credit remains available.  (NY Times - Housing)
No, No, No!  How stupid are we?  
Two quasi-government entities blow billions in taxpayer money, contributing to the housing bubble (and inevitable collapse), and the solution is to create another one?  We’re intellectually bankrupt.  Time for those who wrecked it all to get the hell out of the way and let some new thinking in.

This is a Pollyannaish dream to take the downside out of every market
Markets have downturns for distinct reasons, and they provide a necessary corrective.  Government stepping in and short-circuiting normal market signals creates bubbles, misallocates capital, wastes money and pulls down economic growth.  More insidiously, taxpayer-funded statist projects such as this allow the big bankers to keep one hand in Uncle Sam’s pocket.

A failing market needs more cash like a crackhead needs another vial
Seriously, if your brother-in-law was living riotously and careening out of control, would you loan him money?  Of course not.  You’d want him to clean up his act first.

How about a hard-working, sober brother-in-law who just fell on hard times?  You’d be more likely to lend him money.

Markets work the same way, including mortgages and lending.  Responsible people can borrow at a lower rate.  People with a record of gross irresponsibility may not be able to borrow at all.  Uncle Sam steps in where wise lenders fear to tread, and We The Taxpayers foot the bill when reckless borrowers default.

Would you invest in a foundering company?
Another example:  Which would you more likely invest in, Apple Corporation, or a man on a street corner selling steam-powered tricycles?  No contest.  You put your money where you think you will get the best return.

Markets work the same way.  Irresponsible behavior poses risks, investors see that and pull their money.  You see it in population migrations as well.  Look at Detroit. People voted with their feet and the city is shrinking.  California and New York are also bleeding out productive people and businesses.

Government “backstops” are a horrible idea, because the federal government steps in when the smart money is pulling out.  Bleeding out money (or people) is a market signal that you are doing something wrong and need to correct yourself.  Government money subsidizes failure and masks that signal, protecting the failed enterprise from the necessary pain it needs to go through to get back on firm footing.

Government money also distorts otherwise healthy markets, driving up prices.  Just look at higher education.  It has grown something like five times faster than the overall economy.

A true free market produces only what consumers can afford. Government interventions inevitably end in crashes, burst bubbles, panics, unemployment and tears.  One area where this is not true:  Higher education.  That bubble is still inflated.  Hate those increasing tuition bills?  Thank Uncle Sam.


WomanHonorThyself said...

statist projects don't die easily indeed Silver!

Divine Theatre said...

The lefties will never "get" it.

Anonymous said...

We can expect an individual or entity assigned but one task to perform that task efficiently, and with dispatch. However, an increase of tasks effectively reduces efficiency by exponential factors. The framers of our government understood this. In the wisdom of our founding fathers, which included both federalists and anti-federalists —let us recall that our Constitution was a “compromise” of conflicting interests— the federal government was restricted to a finite number of duties and responsibilities; its authority over the people and the states limited by enumeration.

Our founding fathers understood that less government always equates to more freedom; the reverse is also true.

However, government is composed of human beings who see their elected or appointed positions as opportunities for personal growth of wealth and influence. They will at every turn seek to increase both of these as they “offer services” to a mostly lethargic and stupid people. They will find all sorts of justifications for doing this, and they will find and employ loopholes as steppingstones to power. The commerce clause of the Constitution is one of these loopholes, even though it takes a gigantic leap of logic to make that case (while keeping a straight face). Our problem appears to be that voters have not until very recently charged members of Congress for violating the one document they swore an oath to uphold. Theretofore, in the minds of politicians, no harm -no foul.

Thus, the largesse of the United States government has rendered it inefficient and corrupt. I did hear a tiny rumor about members of Congress now having to identify a specific clause of the US Constitution with any bill requiring public expenditure, but that was only once —and it was a long time ago. If we expect efficient government, then we must demand a smaller government. We can do that by insisting that the federal government confine its interests to the enumerated powers of the US constitution. It would also help to restrict leftists from holding elective office.

Fredd said...

I heard a figure of how far into the red Fannie and Freddie are right now: $500,000,000,000. I know that's a lot of zeros, but that would be $500 BILLION dollars. Half a trillion dollars. Can you imagine any private company getting that deep in debt? Any floundering company such as Freddie or Fannie would have been shut down in a free market after only a few hundred million bad loans. Even Amtrac only runs a billion or so into the red, and they actually provide a tangible service.

Left Coast Rebel said...

I saw the headline, "Obama to dismantle Freddie and Fannie" and knew that there was going to be some sort of Atlas Shrugs truth behind the headline.

98ZJUSMC said...

So ridiculous. The statists are incapable of acknowledging reality, if said reality intrudes upon their utopian governmental meme.

Math doesn't matter! The science is settled!!

All hail the Narrative. Long live the plantation.

amanofwonder said...

Yah figger Barney Frank iz squeezin' cheeks about now.

The whole concept behind these puesdo-private, that was how they were marketed back in the eighties as a truely safe investment, organizations was flawed from the beginning.

The housing market ballon was simply a result of government hot air that blew and blew until it got so big, it exploded. This situation should be taught as the greatest Ponzi scheme ever perpetrated upon those who could least afford what they lost.

Trekkie4Ever said...

I won't hold my breath, but you never know. Stranger things have happened.

Jersey McJones said...

Why do you hate investment in your own country, your own people? What's the matter with you? What kind of country do you want to live in? Some mythical Frontier America?


Silverfiddle said...

Fannie and Freddie are not "investments." They are giant subsidies to the banking and finance industry.

Even if they were investments, by the results they are damned poor ones: millions of foreclosures, secondary markets devastated, US Treasury looted to prop it all back up...

Go on Jersey, keep defending this crap...