The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives, and use government funds to prop them up, government officials told the two companies yesterday, according to sources familiar with the conversations.
See, here’s the thing. Republicans campaign on the evils of government regulation, then reap the benefits when the government has to step in to avert a complete meltdown. While touting the majesty of rugged individualism, the corporate wing of the GOP regularly counts on the Treasury to bail it out. There’s an economic term for this situation: moral hazard.
Regulation of markets is like porridge. It has to be just right. Too much is bad, but too little is bad and sometimes far worse. You don’t need a degree in economics to understand the basic cycles of panic and depression over the course of American history. When charlatans, monopolists, criminals and greedheads take over the system, the results are utterly predictable.
How many times in our lives do we have to bail out the financial industry? The Savings and Loans scandal apparently taught us nothing.
Personal responsibility is apparently for chumps, the little people and those worth less than $5 million.
“Why American Savers Have Drawn the Short Straw
“by Roben Farzad
“BW Magazine
“American savers, take a bow. … You resisted the siren call of plastic teaser APRs, dutifully living within your means ….
“Good for you! Your reward: injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity.
“Even with a current account deficit that, starved of domestic savings, requires $2 billion a day in foreign financing, economic policymakers are fixated on propping up credit and giving the participants in the housing bubble second chances. In order to do so, they are stripping the hides off of net savers.
“Since August of last year, the Federal Reserve has slashed interest rates … in favor of suffering banks … the institutions that screwed up but were too big and important to be deprived of an inalienable right to cheap deposits … they can loan out at several points higher.
“A one-year CD … was offered for as little as 1.92% in April …. It’s hardly a secret that banks are only able to pay out such pittances thanks to depositors’ knee-jerk desire for security: ‘Hey, I might be earning crumbs on my cash, but at least I’m not losing money.’
“Sure you are …. [W]hile your saved buck was adding 2 cents … three times as much was getting singed off the other end ….
“In a perfect world, the Fed’s rate-cutting campaign would have shored up real estate and the stock market. Instead, investors have been running for inflationary cover in hard assets like crude oil, gold, and even fertilizer. …
“Commodity inflation has also been exacerbated by concurrent weakness in the dollar, which is stuck between a Europe that is loath to cut interest rates and a Washington that is too scared to hike them. …
“All of which might be tolerable to the lonely and beleaguered saver if he weren’t taunted daily by lopsidedly pro-spending, pro-creditor news stories. Forget about moral hazard. …
“Maybe savers’ ultimate vindication will arrive when … every asset is so deflated, credit is so choked off, and misery is so prevalent that only those with cold hard cash can lob in lowball offers for homes, cars, and everything else.
“Assuming, of course, they didn’t stash all their money in one of the many banks that is about to go under; the feds are closely watching 117 of them — and counting.”
(Quoted from Business Week under fair use.)
Roger Rabbit Commentary: The current GOP administration is casting moral hazard to the four winds and rewarding irresponsibility. With CD rates thudding below 2% and the wholesale inflation rate exploding into double digits, only a damn fool works or produces anything so he can pay 3 times as much taxes as the Owning Class! Better to have no money than work hard for it only to have it confiscated by inflation, taxes, and medical copayments. We live in the Owner Society now, which is a euphemism for “the Bankrupt Society.” Me, I bought a foreign flag shipping stock today. What I really like about this stock is (a) their ships carry commodities to China and (b) they’re exempt from U.S. taxes. I’m a fucking capitalist now — I ship commodities and jobs to China, pay zero taxes, do no work, and produce nothing! Why the hell should I? I’m a member of the Owner Class now!
Sarah Palin Raised Your Taxes $10 Billion
“Last year she championed a tax hike on oil companies which is helping bring in huge sums — more than $10 billion in the fiscal year that ended in June, according to the companies that pay them.”
(Quoted from The Economist under fair use.)
Roger Rabbit Commentary: The oil companies, of course, which are flush with profits, aren’t really paying those taxes that Gov. Palin uses to hand out cash payments to Alaska residents. They pass them on to you, and you’re paying them at the pump.
The feds must take over the two – or – the dollar will collapse.
Not complicated.
A new giant sort of FHA, what is the panic …
I like nationalization schemes, maybe oil next?
The Fed has to make this move. Interest rates are creeping up putting further pressure on the housing market. They have to reduce the spread between Treasury rates and mortgage back securities. They also need to demonstrate that there will be sufficient liquidity at Fannie and Freddie so banks will have some place to sell their mortgage loans. If the Fed allows our mortgage system to seize up it will collapse the value of real estate, which would be catastrophic to our economy.
There’s no argument that the federal government shouldn’t make this move. But this action is only necessary because the Republicans are keen on maintaining growth at all costs, instead of supporting responsible levels of growth.
Complete deregulation is only great for people that are able to make a killing from price volatility.
I believe an encore is in order. Via Barry Ritholz at Big Picture.
demo kid – get real, this is just real time problem solving on a grand scale
you need to think of the implications of trillions – tens of trillions of American generated real estate paper in default
this is an immense international problem
the Feds must move to shore up this piece of the debacle, everyone who bought that paper worldwide assumed the feds would protect their value …. and they must
@3 Bush’s oil nationalization scheme collapsed in the back alleys of Baghdad and the sands of Anbar Province.
@5 What growth? The only things that have grown under 8 years of Republican rule are CEO paychecks, the billionaire list, and consumer prices.
@7 “you need to think of the implications of trillions – tens of trillions of American generated real estate paper in default”
The houses will still be there. Who cares if Arab sovereign wealth funds get stiffed? They got paid for taking risks, and their gamble didn’t work out this time. Afraid they won’t sell you gas on credit anymore? Learn to hop like a rabbit and you won’t need your Exxon credit card!
@10 We’re here because for the last 8 years America has been governed by dogmatic fools who would rather let the economy go down the toilet than regulate anyone. This happened the last time we had a Republican president, too! Notice it never happens on a Democrat’s watch. To listen to Repubs you’d think financial industry excesses were an Acts of God or random acts of quantum physics or some damn thing like that.
“this is an immense international problem”
Screw the Arabs and Chinese, they’d do it to us! What are you, a pandering pansy conservative who sucks up to foreigners? Where’s your patriotism, man? America first, fuck foreigners! Let ’em eat the worthless paper we sold ’em.
@10
I hate to break this to you, but if ‘personal responsibility was for the little people’ as you state, we wouldn’t be in the housing fiasco in the first place.
None of the little people who applied for loans put a gun to the heads of any of those lenders. If you want to apportion blame, the vast majority of it has to get laid at the feet of the lenders.
You’re also leaving out a very important factor in this whole fiasco: deregulation, though I largely suspect it’s due to ignorance and not due to an outright attempt at deceit.
Deregulation led to firms developing derivative securities based on those loan portfolios. Lenders weren’t banking on the ability of applicants to repay their loans. Lenders were banking on the fact that they could turn around and sell those loans to someone else and that the little folks would always be able to refinance those loans.
This pattern of behavior led to a housing bubble, and, like all bubbles, it burst. Only the bursting meant that the little people could no longer refinance those loans, which, in turn, caused those derivative securities to tank.
Put back the regulation that had been in place, and the incentive to underwrite highly risky loans goes away, and this entire crisis never happens.
Go fucking figure…
Yes. Please do.
Who ever you are – rabbit fool – all those people you mention can collapse the dollar
you are so full of shit
this is not 1890 – fool – it is an intergrated global economy
British banks have collapsed already because of bad American paper – this parody you do is getting thin, and sounding stupid
Remember the American first move in 1920 – did that work out?
“Who ever you are – rabbit fool – all those people you mention can collapse the dollar”
Sure they can. But where do they go with their shrunken dollars? Where is the safest investment vehicle? If they take a piss on the American dollar, they are all fucked. Do you think people will buy $150 toasters from China, or $70,000 VW Rabbits from Mexico?
So guess what…FM/FM will be taken over by government in the bad times, only to be sold back to the same sharks when it is safe to do so. And you and me just pay, pay, pay. The Republican mantra is privatize the profits, and socialize the expenses.
The market should be allowed to work. This series of bailouts by the Bushies will just bring more speculation into the market.
@ 10–
I would agree with the first part of your comment in that there are certainly tons of individuals who made reckless choices in regards to ARMS.
But the lenders should not have been allowed to make ultra-risky loans in the first place, let alone sort them into tranches and sell them as investments. That kind of sophisticated financial product has no place in something as intrinsic and vital to the economy as mortgages. As we’ve seen with junk bonds and such, ultimately it leads to undermining of the market.
Hello? Hey dumbasses they both exist only from federal funding. Read again if you don’t get that!!
@16: And you and me just pay, pay, pay. The Republican mantra is privatize the profits, and socialize the expenses.
That’s exactly it. In effect, investors in the housing market have a great hostage: the entire American economy. They can get all the returns, and the government and taxpayers shoulder the risks.
And for @10, sure… you can say that homeowners were ignorant. But when certain lenders are making commissions based on how many loans they can issue and they don’t need to deal with bad loans afterwards, do you think that they’re going to present an accurate picture to homebuyers? (Not to mention the outright fraud, of course…)
@19
I don’t think our friend at 10 even bothered to read the link to the Wikipedia page on moral hazard in John’s original post. Our resident wingnuts either have very little interest in becoming informed or are only interested in finding information that supports their foregone conclusions.
The American economy is a dead man walking. What’s different from what’s happening now and 1929 and its aftermath is twofold:
First, all the ratchets and air brakes that were built into the New York Stock Exchange after 1987 have caused the market to do a long, steady slide instead of losing half its value in a day. Instead of getting a bullet between the eyes, the securities market is steadily bleeding to death.
Second, Bush’s government has the printing presses roaring night and day to prop up the banks and preserve the illusion of prosperity until at least after the election. By this point after the 1929 crash, general deflation had set in because nobody had anything in their pocket to buy stuff. Now, with more and more green toilet paper with pictures of dead presidents littering the landscape, inflation has gone berserk. This in turn helps camouflage the collapse of the securities market, because the decline in stock prices doesn’t look so bad except the’re being indexed in increasingly worthless dollars.
This will most likely continue until the upperclass folks get upset that the inflationary spiral is cutting into their own lifestyle (“Oh, Pookie my dear…we might have to forego getting you another Bentley this year and stoop to buying a Mercedes…”) and they start having trouble finding a safe place to park their own assets. At that point, Uncle Fed’s misplaced generosity will abruptly end and Katie bar the door, because it’s going to get really, really ugly.
The collapse is going to be spectacular.
Mr. Rabbit has put on full display his shocking ignorance of how the economy works. Please, stop lecturing everyone who posts on HA. You don’t know what you’re talking about.
It truly amazes me how many of you people fail to catch Rabbit’s finely honed sense of irony.
Speaking of irony, we’re really coming full circle here. Fannie Mae was originally created as part of the Federal government in Roosevelt’s “new deal”. Freddie Mac was created by Congress when Fannie was privatized, presumably so the latter wouldn’t have a de facto monopoly on the mortgage aftermarket.
So now, it looks like both are going to have to be taken back into the fold of government, by an administration that’s spent most of its tenure hell-bent on eradicating anything with FDR’s name on it.
@15 Gee, do you have a problem with me sounding like a fucking conservative? See #24. HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR
So, my wingnut friends, you’re saying we should play nice with the Arabs and Chinese? That we shouldn’t pay our debts with Iraqi oil? That we shouldn’t ask the Iraqi government to use their $87 billion surplus to reimburse us for liberating them? When did things change? When did you guys become Arab and commie lovers? Are you fans of french fries and Canadian health care, too?
It’s ridiculously easy to make these guys trip over their own shoelaces.
HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR HAR
I disapprove of government bailouts for Freddie Mac and Fannie Mae. It’s the same as socializing the losses but privatizing the rewards.
The Fed was wrong to bailout Bear-Stearns, too. Failure is part of capitalism. If we won’t bailout the guy running the hot dog stand on Wall Street, why should we bailout the suits on the trading floor of the NYSE?
27 (Putting on my best stiff-upper-lip Rod Serling impersonation voice here…)
Presented for your approval…Condoleeza Rice, the former hard-line “sovietologist” and apologist for the War On (Islamic) Terrorism, sitting down and nearly making kissy-face with Moammar Ghaddafi, known supporter of assassins and terrorists once described by Henry Jackson as having “political rabies”.
@29 “I was against terrorists before I was for them …” — C.R.
@28: Of course, the dogmatic libertarian fools will say that bailing out failing financial institutions was wrong – but then the whole economy might collapse under the weight of bad loans brought about by lack of government oversight.
The flaw in the reasoning of the short-sighted libertarians is that there is NO free market. Teddy Roosevelt figured that out at the turn of the century. Monopolies on oil, energy, and other commodities render the libertarian free market obsolete. Why would Americans use a 19th century system that has been shown not to work, to try and compete in the 21st century.
Libertarians are idealists who don’t recognize that the world has changed since the 1900’s. The problem with the loan industry is the lack of regulation on the lenders to acvtually check and see if the lendees can pay. The ability to sell the loans to third, fourth and fifth parties (so the original lender doesn’t care about the ability of the person taking the loan to pay – just the ability to sell the loan) is lack of regulation. Yup, big bad government is needed to fix the free market excesses.
Same thing with energy – where has the free market developed any rational alternatives to oil?….nada, nothing. Instead, we have record oil company profits and no investments in the infrastructure or new technologies. Once again, we need government to lead. Free market has failed miserably.
However in this case the “moral hazard” argument doesn’t make as much sense since:
a) the managers who made the bad choices are going to get axed (unlike the Bear Stearns bailout)
b) the owners who picked the managers are going to take a huge hit
If you are going to have a bailout, it’s a better bailout than the ones we’ve had recently.
I stand by what I said: if you bailout big companies, then you have no grounds for allowing any failures whatsoever in the economy. The little guy deserves to be treated the same as the big guy. Is it the government’s responsibility to insure every business, large or small, is a success?
For the isvestors in the crowd, I’d avoid CMOs and CDOs.
Obama just blew this one…. big time. God.
There is not an option to not bail out these two – I used to be in real estate – they are critical to the wealth of America.
AND, from the beginning since they are govt chartered the theory has ALWAYS been that the two of them were backed by the govt.
And by the takeover, there will big signals of stability and regulation. Good, good, good.
Obama does not comprehend at this time this move has nothing to do about speculation, but the fiscal stability of America – and over time may not cost all the billions the fear mongers predict. Some of that paper is still good, some may recover, and the bust will not last forever. Many cities will go into housing shortage in three to four years since there are NO new starts – and folks are still breeding new buyers.
@34:
I’m not sure I follow your reasoning. Obama’s response can be found here.
Of the three criteria that Obama lists in that response, which one do you think indicates that Obama doesn’t comprehend what’s going on?