Sunday, June 20, 2010

Fannie and Freddie: The Times Misses the Point

You would think after all the ink that has been spilled over the mortgage meltdown that the Times would get the basic story right. But no. This morning’s piece on the “Cost of Seizing Fannie and Freddie” still peddles the theme of “lenders run amok”. These agencies, which always had implicit government backing, operated in the secondary market. They didn’t make the loans, they bought the loans. By retaking them and continuing to operate them at a loss (the article cites a CBO estimate that the cumulative cost may approach $400B), while sparing holders of agency bonds any losses themselves, the government is using them as a principal vehicle for its bailout of the financial sector.

The word bailout is important here. Readers need to know where and how their tax dollars are being used to protect wealth-holders against reductions in the value of their assets. It is interesting that the federal government spends $80 a month per house to cut grass in a subdivision outside of Phoenix (xeriscaping, anyone?), but really, this is third order.


michael perelman said...

Duhigg, Charles. 2008. "Pressured to Take More Risk, Fannie Hit a Tipping Point." New York Times (5 October).

"... in 2004, his company [Fannie Mae] was under siege. Competitors were snatching lucrative parts of its business. Congress was demanding that Mr. [Daniel H.] Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans. So Mr. Mudd made a fateful choice."

"Disregarding warnings from his managers that lenders were making too many loans that would never be repaid, he steered Fannie into more treacherous corners of the mortgage market, according to executives."

TheTrucker said...

Ok, ya'll. Lots of criticism all round. We have what we have. And what we have is bond holders of Freddy/Fannie bonds who supplied the money that Freddy/Fannie used to buy these mortgages and mortgage backed securities in the secondary market. These bondholders were essentially told that the bonds were only minimally more risky than T-Bills.

There is probably no better place to start unraveling this looters paradise of government backed interest bearing mattresses than with these particular mattresses. The broad question is "WHY do rich people expect the government and the banks to store their money free of charge and in addition expect the government and the banks to _PAY THEM_ for the privilege. The banks are storing this money and keeping it safe from the pirates and bandits that would otherwise kill the owners one by one taking the money?

1. People amass savings as they produce more than they consume.

2. These savings they store away in the form of canned goods that they "put up" for the winter, or they sell the goods accepting "coin" which they then store in a shoe box in the closet.

3. Some of the people take these coins to the bank where the banker has this big safe and they do that because they do not want the robbers to come and kill them and take the money.

The bank is providing a necessary service and should be paid for the service. There is no reason the bank should pay the depositors because loans are not created from the deposits. Loans are created from money borrowed from the Federal reserve, and the depositors money is never at risk.

Yet people think they should be paid for their money. This is a holdover from the "gold ole days". There is _NO_ justification for paying people for the privilege of storing their money. And all federally backed financial instruments are nothing but savings accounts in one form or another.

The money needed to "rescue" Fannie and Freddie should come from the Federal reserve as open market purchases using NEW money, This should devalue the existing money extracting the payments due for the service of safekeeping people's money.

TheTrucker said...

"... in 2004, his company [Fannie Mae] was under siege. Competitors were snatching lucrative parts of its business."

Is this not a sort of anecdotal evidence that government should not be a "competitive" enterprise? If government is going to establish an interest rate floor and be a lender of last resort, then competition and profitability do not fit. I am not real sure that home loans should be privatized any more than Medical insurance. The risks and the costs are systemic and statistical in either case. There is no need for marketing or wage cutting, and no _REAL_ capital (shovels and backhoes and dams and bridges and factory stuff) is required. It is all monetary management. And for home loans the rates float with the T-Bill rates anyway. Where geography and local development (jobs) are concerned the price of the land as included in the price of the homes will vary. Construction costs have to do with the amount of illegal immigrant labor. But none of this has anything to do with interest rates. The rates are tied to the T-Bills.

Although Medicare costs vary based on land values, the total cost of Medicare is what it is. Right now Detroit hospitals are handling some Canadian Medicare business. A reflection of local land rents I would think.