Market bail-out

Well, this answers my other question to you earlier. But now I have a new one: why, if you trust the economists to tell us to oppose the Bush plan, do you not trust them when many of them say that the crisis was/is real? Because many of them (even ones not mentioned on your list) do/did, and that’s ignoring, for now, the merits of the Bush plan.

ETA: D’oh. I just realized what you could be saying here: that a real crisis is being taken advantage of, or even deliberately done, to push this agenda. If this is what you think, please clarify. But even so, I’m still curious whether you think things are bad enough to warrant quick/immediate action.

Sorry, but like all bubbles, the profits and losses were pretty widely distributed through the economy. People benefited when their 401(k)'s holding the mortgage securities went up. People who owned houses before the bubble and sold during the bubble made a bundle. The millions of people who took out home equity loans against their newly-valued homes and blew the money also benefited. Many of the failed mortgages did so because the homeowners converted paper value into real value, then walked away when the paper turned out to be worthless.

All the people employed in the booming housing industry benefited. The developers of homes and real estate agents benefited.

And like all booms that go bust, the pain was spread pretty widely as well. Not only did poor people lose their homes (and whether an individual was hurt or helped was often due to just an accident of timing), but rich people had their stock portfolios crashed. The CEOs of a couple of major investment firms may have walked away with golden parachutes, but a lot of wealthy stock traders and middle managers were wiped out. Rich people who were heavily invested in these securities may have just seen their net worth plummet by 20% or more.

There was plenty of benefit to go around, and now there’s plenty of pain to go around. But for some people, any time there’s a problem in the economy, it’s always the fault of the rich. And the rich must always be the ones to pay.

This bill says Paulson can hand over money to any financial institution without limitation.
It also says Decisions are not reviewable by any court or administrative agency.
Sorry ,what is he planning to do that needs to be hidden and above courts and regulation.
Something smell here.

Here is the list of recipients from the last 20 years, from Sam’s link.

Name   	 Office   	 State   	 Party   	 Grand Total   	 Total from
PACs 	Total from
Dodd, Christopher J 	S 	CT 	D 	$165,400 	$48,500 	$116,900
Obama, Barack 	S 	IL 	D 	$126,349 	$6,000 	$120,349
Kerry, John 	S 	MA 	D 	$111,000 	$2,000 	$109,000
Bennett, Robert F 	S 	UT 	R 	$107,999 	$71,499 	$36,500
Bachus, Spencer 	H 	AL 	R 	$103,300 	$70,500 	$32,800
Blunt, Roy 	H 	MO 	R 	$96,950 	$78,500 	$18,450
Kanjorski, Paul E 	H 	PA 	D 	$96,000 	$57,500 	$38,500
Bond, Christopher S 'Kit' 	S 	MO 	R 	$95,400 	$64,000 	$31,400
Shelby, Richard C 	S 	AL 	R 	$80,000 	$23,000 	$57,000
Reed, Jack 	S 	RI 	D 	$78,250 	$43,500 	$34,750

Five Republicans, five Democrats. Again. were the mortgage companies with no government money any more responsible, and why are you objecting to this lobbying that made F&F more deregulated? if the free market really worked so well, they should be making a bundle and the entire economy should be in great shape.

Face reality - deregulation of the mortgage market and of both companies with government backing and those without it which were too big to fail got us into this mess. You took down the fence, and the market fell off the cliff. It is now hanging on for dear life to a little tree on the cliffside, and it is going to take an expensive crane to lift it back out. Or would you rather it splat on the canyon floor?

The lobbying list is for money from Fannie and Freddie but the US mortgage industry obviously extends far beyond these two institutions. And if I understand it correctly, sub-prime refers to loans which are below the standards of the GSE’s so it’s hard to argue that they lie at the heart of the crisis. The innovations that ultimately produced the crisis came from purely private sector players not the GSE’s.

Incidentally here is a new plan proposed by Dodd. In addition to the obvious oversight measures it proposes that the government also obtain equity stakes in companies whose securities it purchases. I am not seeing the point of this. If the government also receives equity in the companies presumably they will demand a lot more for the securities they are selling. Or there will be far fewer securities sold to the government which means that the plan won’t have much of an effect on the balance sheets of the financial sector.

I just came across this and had a Bush worthy smirk.

February 2001

Outline of the U.S. Economy. Section about what we learned from the S&L fun.

You fail to understand the difference with Fannie and Freddie. They were not free-market entities. They existed in the gray world between government and business - they were free to profit, but ultimately their risk was underwritten by the U.S. government, and everyone knew it. That gave them a competitive advantage which allowed them to grow out of control, and it also gave them a false sense of security which caused them to be reckless.

This isn’t a failure of the market. It’s a failure of the government’s meddling in the market by setting up Fannie and Freddie in the first place.

The parallels with the S&L bailout at interesting, because the same pattern existed - they were private companies allowed to make lots of profit, but their loans were secured by the FDIC, sheltering them from much of the risk from loaning out money to bad risks.

If we learn anything from this, it’s that you can’t have it both ways. You can’t set up an institution that pretends to play in the marketplace but which is backed by taxpayer dollars. That would be an argument against government nationalization of industry and other instrusions into the market in the attempt to increase profits or run things ‘the right way’. If a business is free to make profit, it must be free to fail. Otherwise, you turn the system of checks and balances on its head.

Just to clarify, are you asserting that the current mortgage and credit crisis wouldn’t have happened if Fannie and Freddie either didn’t exist or were fully private? That it was their existence as government-sponsored entities that caused investment banks to invest in overvalued mortgage-backed securities to the point that they’re now facing insolvency?

Also, do you believe that the government should let the big investment banks fail, in the spirit of the “free to profit, free to fail” philosophy? I’m on the fence about it myself, right now – I hate the proposed bailout from a straight philosophical standpoint, but I don’t think a pure hands-off approach is a good idea either if it leads to a major collapse. Keeping the rules consistent and fair will be poor consolation if we end up in the Great Depression, part 2.

But look, Fannie and Freddie aren’t the whole story here. Plenty of entities that did not have government backing failed as well, including three investment banks, which explicitly have less regulation than commercial banks. The crisis involves entities all up and down the chain, from the GSEs to investment banks to commercial banks to the ratings agencies. Trying to claim that the crisis is all about Fannie and Freddie, and that it’s entirely about governmental interference, is stretching the facts to fit your own ideological slant.

May the Free Market forgive you!

Partially. Fannie and Freddie were the prime customers of sub-prime mortgage pools. They bought these up from banks seeking to securitize their mortgage holdings. The availability of this huge buyer of mortgage assets in turn gave banks the incentive to take on higher risk mortgages. If Fannie and Freddie had not been willing to assume the risk of these mortgages by buying them up at preferential rates, the banks would either have had to hold them, which would require them to take on the risk, and therefore either refuse to give out risky mortgages or charge a risk premium which would have helped regulate the number of these mortgages that were given out.

Fannie Mae and Freddie Mac are able to this in part because their secured status (backed by the US treasury), allows them to borrow money from foreign investors at preferential interest rates. Also, because these two agencies have an unlimited line of credit from the treasury, they were willing to leverage their holdings to a much greater degree than was wise.

The failure of these two GSE’s is what started this whole chain reaction. Fannie and Freddie hold 90% of mortgage-backed securities. Once it looked like these securities were at risk, the banks that thought they had secured capital realized otherwise, and so did their customers. This caused an instant crisis of confidence, which led to the ultimate failure of the larger banks.

Had Fannie and Freddie not existed, the risk that these mortgages entailed would have had to be absorbed by other private agencies putting their own capital up for grabs. That would have caused the risk to be priced accordingly. But with Fannie and Freddie in the mix, the banks had a way to push their risk onto the U.S. government, and ultimately the taxpayers. With their risk exposure lowered, they were free to take on more of it than they otherwise would.

Then the mortgage bubble burst, and the whole house of cards came crashing down.

Now, I’m not saying that if Fannie and Freddie did not exist that there would have been no bank failures. There would be, and should be. Capitalism demands failure as well as success to remain dynamic and efficient. But without those two, all these banks would not have been tied together through one huge, risk-absorbing capital pool, and therefore they would not have been as leveraged and they would have been more isolated from each other, reducing or eliminating the risk of a systemic collapse.

Now, I’m still getting up to speed on all this myself, so I may have missed a detail or two, but that’s my take on the situation.

No, the problem was in setting up a situation where the government absorbed the risk of the capital markets in the first place. That’s where the ‘free to fail’ ended. Now the damage is done. People a lot smarter and more knowledgeable than me are convinced that had the government let these banks fail now, the result would have been a catastrophe (one estimate I read said 30 trillion dollars in damage, and a stock market below 8,000 would have resulted). It could have turned what’s going to be a very expensive, growth-robbing bailout into a disaster on the order of the great depression.

I don’t have the expertise to doubt them. At some point, you have to trust that they know what they’re talking about. And the risks of second-guessing them are immense, so I think you have to go on with it. But from here on in, I think Fannie and Freddie should be slowly weaned from their ability to seek redress from the government, perhaps broken up into several smaller lenders, and proper accounting principles put into place to propertly monetize the risk they undertake. Eventually, I’d like to see the capital markets completely privatized, and the government should sell off the assets it’s now taking on as quickly as possible.

The result of getting out of the business will probably mean that in the future riskier loans will have much higher interest rates. The reason the Democrats were such friends of Fannie and Freddie was because they were trying to keep rates low for poorer people who don’t represent great risks to the bank. But hey, that’s the way it goes. We’re probably also looking at tighter capital for business startups and other high-risk investments, which may slow growth slightly, even after the cost of the bailout is absorbed.

My .02, anyway.

No, I don’t believe that the sole problem is Fannie and Freddie. But the existence of those two GSE’s seems to have magnified the problem greatly, for the reasons I outlined in my last message.

And I’m not suggesting the capital markets should be de-regulated. I’m saying that it’s a bad idea to have a market where the upside of taking on risk is great, and the downside minimized by having the government be an insurer of last resort. You just can’t wipe the cost of risk off the books and expect the market to function properly. Perhaps the best answer is more regulation in the sense that the government will have to develop accounting standards such that risks are made more transparent and large risk pools need to be approved or something. But I’m getting out of my depth when it comes to the details.

Banks will always fail. So will insurance companies. And mortgage brokers, and other financial companies. As I said, Capitalism demands failure as much as it demands success, and to attempt to eliminate failure while pumping up success is a fool’s game.

A “Sub-prime” loan is defined partly as a “non-conforming” loan, i.e. not conforming to Fannie and Freddie’s guidelines.

Which bill was that?

If you question individual contributions, then why include them? Clearly they shouldn’t be included. It’s blatantly obvious why Democrats took in more money when you include individual donations. Obama, Kerry, and Clinton were all major Presidential candidates, and garnered a lot of donations for that. No Republicans on that list ran a major campaign for president. If you look at the top ten donations from the PACs it’s:

  1. Blunt, Roy- R
  2. Bennett, Robert F- R
  3. Bachus, Spencer- R
  4. Bond, Christopher S ‘Kit’- R
    5-T. Boehner, John-R
    5-T. Reid, Harry- D
  5. Kanjorski, Paul E -D
  6. Reynolds, Tom- R
  7. Hoyer, Steny H- D
  8. Dodd, Christopher J- D

Republican heavy at the top there.


Look, you can parse the data all day long any way you want. And I’m not sure removing individuals is correct, because of ‘bundling’, in which people get around campaign contribution limits by using many people in one bundle. This gives the bundler the same political clout as if he just handed over the cash from his own pocket, while staying within the rules.

But there’s a larger point to be made, which is that in any given year Fannie and Freddie would donate to both Republicans and Democrats in almost equal measure. Since the Democrats controlled Congress, they’ve gotten 57% of the contributions vs 43% for Republicans. But when Republicans controlled it, they got 53% to the Democrat’s 47%.

Big organizations like this donate to both sides. That should tell you right away that they’re not interested in helping one side win over the other, but they’re simply buying access across the board. Everyone gets a piece of the pie, so everyone has a vested interest in looking the other way.

Chris Dodd does seem to be a bit of an outlier. It’s not a coincidence that the Chairman of the Banking Committee is also the recipient of the most money from the firms he is charged with regulating. He has also been very active in preventing the kind of regulation that was needed - personally intervening with the President to get him to back off on pushing regulation, for example. And it’s not a surprise that the top of the money list includes many members of the Banking Committee, both Democrat and Republican. The whole system needs an overhaul.

And you continually ignore the fact that the non-governmental mortgage companies got us into this mess. Why did the mess not happen for decades of F&F? Why do you think a totally deregulated non government backed F&F wouldn’t do the same thing as Countrywide. Countrywide didn’t sell their paper to F&F, they sold it on the open market.
If Fannie and Freddie were properly regulated so that they would have decent capitalization and would only buy the loans they were supposed to buy, they’d have been in much better shape. They might still have a problem because the actions of the unregulated market caused even good loans to be underwater, but it would be better.

You do remember why we have an FDIC, right? Do the words “bank run” mean anything to you at all? We know what happens to the banking system without this kind of back up.

That I agree with. You can’t have an unregulated entity with government backing. But there are some cases, like banks backed by FDIC, where government backing is absolutely required. In those cases, we need to regulate and reject the siren call of how much better the markets would work without it for those entities. Unregulated, unbacked institutions should be the default, of course.

However, even those unregulated entities should fall under truth in selling laws. For the market to work, the conditions of loans being resold need to be very clear. I’m fine with lending to those with no income if that is your business plan, but don’t sell the paper pretending normal screening was done. Is that ok with you, or is that kind of thing too much regulation also?

In fact

From here.

They were indeed negligent in sneaking down their capitalization levels. They indeed got hurt by the liquidity crisis.

Do the GSEs actually hold subprime loans? I haven’t found any evidence they do, but here is some they don’t:

From here..

Sam, care to give some cites for your contentions about the quality of their holdings? They did put themselves into a risky condition, which was bad, but everything I’ve seen and read is that the crisis was touched off by bad lending practices in the part of the market free of government backing.

The Gramm/Leach/Biley act repealing the provisions of Glass /Steagall was passed in Nov. 1999 . It was passed along party lines with a vote of 54-44. Do not hold Dems responsible. The Repubs have been deregulators since Reagan. This is their problem.

His general point is still fair. Any way you cut it, the GSEs were a government subsidy to the housing market, which distorted incentives, which caused and intensified the housing bubble.

I think reining in the FMs vastly overstates the goal and likely outcome of that bill. The proximate cause of that bill was an accounting scandal regarding executives cooking the books to inflate their earnings. It didn’t really have anything to do with FMs leverage ratio, or subprime mortgages.

Hey, if you want to play the “they both took a lot of money” card, then you should have done that before your lame “the Democrats took more money” card. In fact, you’re still trying to play it even after I showed why the numbers are skewed.