Arnold Kling  

Bailed it Shall Be

PRINT
The Consensus Economic Platfor... I Need Talking Points on Fanni...

The New York Times reports it.


Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.

That means that no matter how badly the housing bill stinks, it will now be passed and signed quickly. It seems to me that it would make more sense to do the Freddie/Fannie bail separately, but obviously the Bush Administration is not strong enough politically to make that happen. When I last tuned in, the housing bill envisioned the FM's standing as a bulwark for the housing industry, even paying a new form of tax to support "affordable housing." Is that nonsense still in the bill? Probably.

James Hamilton found a different version of the Times story that says the plan would


give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac

Now that sounds downright weird to me. It means that the government could be bidding up the price of shares, which does interesting things for shareholders and really interesting things for short-sellers.

I still would like to see lower capital requirements for banks to buy mortgage assets. Let them feed on the carcass of the FM's. That would be a reverse of what happened in the 1980's, when the FM's fed on the carcass of the S&L industry.

Hamilton likes the bailout. I'm not sure I do, but I guess if the alternative is a total financial meltdown, you gotta approve it.

Over at Grasping Demagoguery with Both Hands, Brad DeLong writes,


Fannie's and Freddie's troubles make it more and more clear that the financial-market deregulation agenda of the late 1990s that Phil Gramm spearheaded was a more serious mistake than almost of any of us realized back at the time...

Let me give Professor DeLong an assignment. Find a list of all of the prominent calls for regulation of Freddie Mac and Fannie Mae over the last 15 years. Then write the name of the political party or the publication who called for that regulation on the blackboard. Do it 100 times. It will help your penmanship. It might even help your grasp on reality.

Instead, Congress gave the FM's the regulatory arbitrage to get too big to bail. On top of that, it put them under pressure to "do their share for affordable housing" (translation: jump on the subprime bandwagon).

Suppose we fill in the blank to the following sentence:

Government intervention is the ____ for the recent housing crisis.

It seems to me, particularly if the FM's are the biggest risk factor, then you have to fill in the blank with "cause" and not "solution." But DeLong will be braying the opposite, and my guess is that the conventional wisdom will flock to his position.

UPDATE:

Paul Krugman writes,


they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

That's not the story that I was hearing from my friends at Freddie a couple of years ago. What I heard was that the market stopped producing investment-quality loans, and to stay relevant the FM's had to buy into the junk loans. I have no first-hand knowledge, but I think it's hard to explain all the losses that the FM's are suffering if their borrowers were putting 20 percent down.


Comments and Sharing





TRACKBACKS (2 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/868
The author at PrestoPundit in a related article titled BUSH GIVES BILLION$ MORE writes:
    of your money to the multi-millionaires running the corrupt mortgage industry.Bush has become histories greatest tax collector and borrower for all of the corrupt and failed New Deal and Great Society programs, from farm subsidies to Fannie Mae to Soci... [Tracked on July 14, 2008 12:49 AM]
The author at The American Mind in a related article titled Economics Links–07.14.08 writes:
    This is a special Fannie Mae/Freddie Mac edition since they’re the big story today: The Washington Post gets into the many angles of the rescue and their effects on the economy. Barron’s thinks a full-blown nationalization of Fannie Mae an... [Tracked on July 14, 2008 3:31 AM]
COMMENTS (5 to date)
Dan writes:

Arnold, for those of us how don't follow the legislative history of who called for regulation, could you fill us in?

Also, this was a good description of what happened

http://billburnham.blogs.com/burnhamsbeat/2008/07/fannie-maes-gol.html

Arnold Kling writes:

Dan,
This story originally ran in the NYT:
http://www.theday.com/re.aspx?re=ca56609f-6dc7-43fd-b571-077f978b5567

Mark writes:

The Wall Street Journal's editorial page, shunned by the left for its conservative views, has railed for years against the special treatment afforded the likes of Fannie Mae and Freddie Mac. The WSJ's concern, along with the accounting problems, was just what is happening now. In fact, there was a great exchange between the WSJ editors and, I believe, Franklin Raines, a Clinton appointee. (If it was not Raines himself, it certainly was FM's top brass who signed the letters.)

Matthew writes:

I was gonna short these turkeys to zero but the risk of government buying out shareholders in FNM at, say $25 a share makes that far too risky.

So instead I shorted the regional banks this AM. . .

Our financial system is so, so, so screwed. . .

david writes:

Barney Frank has been intervening in the housing market to the detriment of taxpayers since he was part of Kevin White's ethnic cleansing effort in Boston in the '60s. Did you really expect him to change now?

Comments for this entry have been closed
Return to top