Americans Should Be Outraged by the Bill I'm Voting For!

Matt Welch | July 24, 2008

John McCain has issued a curious response to the housing bailout bill. Here's how it begins:

Americans should be outraged at the latest sweetheart deal in Washington. Congress will put U.S. taxpayers on the hook for potentially hundreds of billions of dollars to bail out Fannie Mae and Freddie Mac.

With combined obligations of roughly $5-trillion, the rapid failure of Fannie and Freddie would be a threat to mortgage markets and financial markets as a whole. Because of that threat, I support taking the unfortunate but necessary steps needed to keep the financial troubles at these two companies from further squeezing American families.

This strikes me as a classic example of intervention's inescapable logic: We broke it, so we bought it, and now it's too big to fail, even though it all sucks in the first place.

On that latter point, McCain has some interesting things to say:

[I]f a dime of taxpayer money ends up being directly invested [in Fannie/Freddie], the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists. And taxpayers should be first in line for any repayments.

Even with those terms, sticking Main Street Americans with Wall Street's bill is a shame on Washington. If elected, I'll continue my crusade for the right reform of the institutions: making them go away. I will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.

What about Obama?

I'm heartened that the President has decided to support this bipartisan bill that will help ensure that mortgages remain affordable for American families and to prevent hundreds of thousands home foreclosures. In the months since this housing package was announced, nearly a million additional families have faced foreclosure, and our economy has continued to deteriorate. We cannot wait for a million more foreclosures before taking additional action to help struggling families and strengthen our economy. That's why I've also proposed a second stimulus of at least $50 billion with energy rebates for families struggling with high gas prices, relief for states facing budget cuts, and additional measures to protect homeowners from foreclosure.

Bob Barr? A bit like McCain (interview is 10 days old):

I think right now, doing nothing would not be advisable. As much as a Libertarian, we don't like to see − and I don't like to see − the government get further involved with yet another sector of the economy.

I think, because the government has caused this problem, similar to the savings and loan problem that the government caused a generation ago, it has to do something. [...]

Yet, as long as it is done with the thought in mind that there has to be long-term congressional action here to restructure and reformulate the very way Freddie Mac and Fannie Mae operate, I think that would be an advisable solution, but not doing nothing. [...]

But the ultimate goal, I think, has to be a very firm commitment to restructure Fannie Mae and Freddie Mac.

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Penn|7.24.08 @ 12:13PM|#

I've said it 24 times (to strangers, my boyfriend, mt cats, and all you people): if we don't bail out Fannie and Freddie, the economy will fail.

One more time? Yeah, one more time:
If we don't bail out Fannie and Freddie, the economy will fail.

You can't lose 70% of your primary and secondary mortgage markets.

|7.24.08 @ 12:14PM|#

Obama said:

In the months since this housing package was announced, nearly a million additional families have faced foreclosure, and our economy has continued to deteriorate.

Yes, that's right, they're all families. Every single foreclosure is a family. And that means kids on the streets. Homeless. Nekkid. Starving.

It's for the children, dammit! Why won't Freddie and Fannie think of the children?

|7.24.08 @ 12:15PM|#

FUCKING BARR
FUCK HIM
God Dammed neofascist

shit shit shit

|7.24.08 @ 12:17PM|#

You can't lose 70% of your primary and secondary mortgage markets.

Sure you can. Particularly when all you'd be losing is a subsidized price support.

These aren't banks. These are holding companies.

Nigel Watt|7.24.08 @ 12:17PM|#

I've said it 24 times (to strangers, my boyfriend, mt cats, and all you people): if we don't bail out Fannie and Freddie, the economy will fail.

I don't doubt that, but I'm beginning to think that a full-scale SHTF would be a good thing.

robc|7.24.08 @ 12:17PM|#

Penn,

If we don't bail out Fannie and Freddie, the economy will fail.

Bullshit.

You can't lose 70% of your primary and secondary mortgage markets.

Bullshit.

Of course, my definition of economy failing may be different from yours.

robc|7.24.08 @ 12:18PM|#

Just to clarify my 12:17 post:

1929 USA - economy didnt fail
2008 Zimbabwe - economy has failed

Francis Wolcott|7.24.08 @ 12:18PM|#

I am a man of many sins, some unforgivable. But at least I am not a politician!

|7.24.08 @ 12:27PM|#

If we don't bail out Fannie and Freddie, the economy will fail.

The exact opposite is true. Not baling out F&F will facilitate a quicker and more robust recovery.

The interesting thing is that FNM and FRE were able to offer lower rates because they were implicitly backed by the federal government. Everyone figured this was like selling a well out of the money put that eventually was cashed in. Every homeowner with a conforming loan got a lower rate in the past 30 years because of this backing. They pretty much can't bitch because they're paying for what they got. However, as is true with most government actions, the young, single and poor get the short end of the stick.

You guys, Penn is right. Fannie and Freddie are the only thing protecting those ailing homeowners from the evil forces of Kapitali$m.

If people and institutions are held responsible for the debts they incur, the economy will collapse and we'll all be flung back into a Hobbsian state of nature.

~~People~~ Children will be driven from their homes, forced to live in the streets as prostitutes and drug dealers. We'll all be reduced to cannibalism by the end of the decade. The houses, of course, will all be swallowed by the earth.

|7.24.08 @ 12:30PM|#

Penn--Keep saying it. The stopped clock will give you a bump in credibility soon enough.

|7.24.08 @ 12:39PM|#

You know, McCain seems like a maverick, but I bet it's all a myth. Hmm, maybe someone should write a book about it. And maybe pimp it on the left side of the page.

tarran|7.24.08 @ 12:42PM|#

Penn,

You admit you have no idea of how Fannie Mae and Freddie Mac integrate into the economy. Yet you confidently perdict what will happen if they go bankrupt.

Honestly, if you don't have a mechanism in mind to back up your claims, and aren't prepared to discuss it, people aren't going to listen to you.

People are patient with you. I personally am cutting you slack because you mistakenly read a book by Galbraith (which is like learning astronomy by reading Nostradamus - Galbraith's predictions were so far off, and his theories so thoroughly debunked that he became the butt of jokes in the last few decades of his life).

Why don't you read some of the responses people have made to your claims and try refuting them? You might learn a few things, gain a few friends, an dimprove the tenor of discussion.

Elemenope|7.24.08 @ 12:44PM|#

Just to clarify my 12:17 post:

1929 USA - economy didnt fail
2008 Zimbabwe - economy has failed

Huh. And you called Fat Man a wet firecracker, didn't you.

Admit it!!!

Economies are only good insofar as their utility; they are a human tool for a specific end, namely, efficient resource distribution when information cannot be easily aggregated at a central point.

When it stops performing that task properly, it has failed. Bread lines and 20% unemployment are a really big clue, I think.

Now, there is a difference between a failure and a *Catastrophic Debacle*, that I'll readily grant. But anyone who can look at the economy in January 1930 and say "yep, just hummin' along!" has some proportion issues.

|7.24.08 @ 12:54PM|#

Now, there is a difference between a failure and a *Catastrophic Debacle*, that I'll readily grant. But anyone who can look at the economy in January 1930 and say "yep, just hummin' along!" has some proportion issues.

Failed < Crippled < Stalled < Limping < Hummin' Along

There are more than two choices LMNOP. I agree with robc that the Great Depression is not an example of a failed economy.

We're not even at 6% unemployment. Right now, I'd go so far as to classify our present situation as Limping, but Stalled is probably more accurate.

|7.24.08 @ 12:57PM|#

If I could own or run a business where I pocket any profits ant the taxpayers cover any losses, I ~~might~~ most definitely be ~~a bit~~ extremely reckless in my decision making thought processes.

See the problem everybody? Any questions about why Fannie and Freddie need to be taken behind the barn and shot?

Taktix&#174|7.24.08 @ 12:57PM|#

Barr said:

I think, because the government has caused this problem (...) it has to do something.

I apologize to everybody I was arguing with during the LP primary. I am officially off the Barr train, though I was never one to give a crap about the LP anyway.

Liberty is dead.

I don't doubt that, but I'm beginning to think that a full-scale SHTF would be a good thing.

20 years ago, I'd have agreed.

But under the current political circumstances, any major downturn, like the collapse that's necessary to reboot this economy, will be met with more government takeover of parts of the economy and society as a whole.

I fear we've already crossed the Rubicon on the way to being a socialist nation, and any fight now is merely a fight to slow the slide...

robc|7.24.08 @ 12:59PM|#

lmnop,

Our economy came back from the great depression. Zimbabwe needs a reboot.

Hence, the difference.

|7.24.08 @ 1:05PM|#

That's it
We're fucked
Everybody pack up your stuff and go home
Game over

Bill Woolsey|7.24.08 @ 1:07PM|#

McCain's position is much better than his first response. His first response looked to be supporting Fannie Mae and Freddie Mac as means of promoting home ownership.

"Those institutions, Fannie and Freddie, have been responsible for millions of Americans to be able to own their own homes," McCain told reporters Thursday after a retail stop at a local diner. "They are vital to Americans' ability to own their own homes and we will do what's necessary to make sure that they continue that function."

Here McCain calls for long term privatization.

Barr's press release was much better than his interview on Fox.

"Bob Barr Says Privatize Fannie Mae and Freddie Mac, End Government Subsidies"

http://www.bobbarr2008.com/press/press-releases/56/bob-barr-says-privatize-fannie-mae-and-freddie-mac-end-government-subsidies/

(I am not too optimistic about the link, but you can find it on bobbarr2008.com )

Anyway, the release takes the position that government must prevent them from failing in the short run (much as he described in the interview,) but gives a better explanation of the need to shrink and privatize the firms. In the press release, the long run solution comes first, as can be seen from the headline.

By the way, Barr didn't endorse the specific bill that Bush agreed to sign into law. In an earlier release, he was critical of bailing out homeowners.

The problem with failure is liquidation. That is, all of those mortgages will have to be sold. This will further depress the value of mortgages and so the value of banks' balance sheets. (Banks hold 4 trillion in mortgages) This could lead to bank insolvency and so, liabilies for FDIC along the lines of the Indy Mac problem. It could be really bad. I think there are a variety of points, however, after allowing default and bankruptcy of Sallie Mae and Freddie Mac, where a great depression could be avoided. I would note, however, that there are plenty of libertarians who would oppose each and everyone of those stopping points as well. And following through on their views could very well lead to a another great depression. (Don't forget, Murray Rothbard wrote an essay praising the deflation of the Great Depression.)

Personally, I believe that it is both politically expedient and wise to advocate a careful path to privatization and deregulation of finance.

Taktix&#174|7.24.08 @ 1:09PM|#

We're not even at 6% unemployment. Right now, I'd go so far as to classify our present situation as Limping, but Stalled is probably more accurate.

Sorry to be overly skeptical, but I have a tough time believing the Bureau of Labor Statistics figures. They are an office of the:

Department of Labor
Executive Branch of the Federal Government
101 Bullshit Avenue
Crawford, TX

If this administration had at least told the truth, maybe... more than 2% of the time, I might believe some of the information coming from them.

I have a tough time believing that all this country's been through over the last eight years, 9-11, Katrina, Iraq, Housing Bubble, that the unemployment rate has only deviated at most .3% from it's perpetual 5% mark.

Seriously, it's been between 4.7% and 5.3% this whole time!

squarooticus|7.24.08 @ 1:15PM|#

That's it: prepare for massive inflation to "solve" the credit crisis.

I think this near-universal support for bailing out FNM and FRE is final proof that the deflationistas like Gary North are wrong. Looks like it's time to load up on precious metals and commodities, because the dollar devaluation we've seen so far is nothing compared to what's coming.

Fluffy|7.24.08 @ 1:16PM|#

"I will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government."

I think what you have to keep in mind is that eliminating Fannie and Freddie would not constitute a deregulation of financial services in the United States.

We would still have a huge system of regulated financial services entities with greater or lesser barriers to entry, state support, controls on products and services offered, etc.

So merely calling for the elimination of these two bodies does not establish your libertarian bona fides or your deregulation bona fides.

I have hilighted part of McCain's statement to illustrate what I mean.

Based on my familiarity with the industry in general, I can tell you that McCain's quote here basically could have been written by a lobbyist for a major money center bank. It's practically word-for-word the rhetoric I am accustomed to encountering from Citi guys who want the agencies to go away because they want margins in the mortgage market to go up. If the standardization and commoditization the agencies provide in the mortgage market were to go away, the money center banks would use the resulting market confusion to make mortgage products as opaque to the consumer as possible, in order to gain an information advantage and raise margins. Margins for A paper loans would probably rise to the level that was present in subprime until that sector blew up.

My problem with calling this a deregulation or a libertarian solution is that basically we would be exchanging one group of rent-seekers for another group of rent-seekers, and the group of rent-seekers we've currently got steals less.

djyrn|7.24.08 @ 1:19PM|#

Just a guess at what happens if FNMA and FHLMC fail....

First the assumption is that failing means, no more loans. That's a big one.

The non-prime bank backed market is still hurt by their own problems. Wells Fargo, B of A, and smaller regionals will be the two market makers to step in, but rates will be very, very high as they have no place to sell loans off their portfolio.

Home prices will drop, and foreclosures will increase as a result. The myth in the mortgage debacle is that it's the loans that cause foreclosure. The loans don't cause the foreclosure, it was the assumption that prices go up a high enough rate that people can get out alive.

House prices will have to drop to a level that is supported by incomes. With higher rates that's a larger drop then we're seeing now with rates around 6%.

The alternative, is for inflation to fill the gap. That would be bad, but predictions are difficult because higher rates would mean tighter money.

What really ought to be done is for the fed to raise rates. That may lead to recession, but it isn't really the feds job to keep us in growth or out of recession anyway.

What we have now is stimulus on top of stimulus that won't work and will simply lead to inflation with very little growth.

|7.24.08 @ 1:19PM|#

Face it. We have no control, except in how we spend our dollars. If everyone just gives "his" house back to the banks, and rents for awhile, the banks and the Fed and the govt will sort it out amongest themselves. the Fed and banks only have leverage against Congress and the President if we as "homeowners" give it to them.

What's the tragedy? No one owns a home until they've been enslaved to the banks for 30 years.

Taktix®|7.24.08 @ 1:27PM|#

Bobo,

The problem is that most of these "homeowners" are house flippers and speculators, the same speculators that these same politicians are whining about when you replace "mortgage" with "oil."

|7.24.08 @ 1:32PM|#

I have a dream. My hope is that in a decade or so we finally get to a situation where private banks, using whatever funds make sense to them (deposits or investment accounts) write mortgages at rates that cover the investors AND account for default risks as determined by the marketplace. These loans would not in any way be backed except perhaps by PMIs. Banks would generally require borrowers to show their personal commitment by first coming up with 20% or so of the value of the house before leveraging the rest. Borrowers would also be required to show a history of repaying their debts (good credit) as well as prove an ability to make their mortgage payments (income verification).

That situation, as sane as it sounds, would be defined as a failed economy today.

IMHO
The mortgage crisis isn't nearly as big as the oil crisis. The mortgages we're referring to apply to a minority of people who either
a. are speculators, or people who didn't actually want to live in the house they bought, or
b. presumably would have f'ed themselves financially anyway

Oil is affecting everybody, and hard

robc|7.24.08 @ 1:36PM|#

Bobo

No one owns a home until they've been enslaved to the banks for 30 years.

13 days ago I sent an additional principle payment that knocked 10 years off my mortgage. So, in theory, Im enslaved for another 19 years and 4 months, but I figure problem about 6-8 in actuallity.

With that payment Im over 50% equity!!!! I own more than the bank does!!!

"problem" was supposed to be "probably". Not sure how my brain made that mistake. Weird one.

djyrn|7.24.08 @ 1:41PM|#

Foreclosures do effect me, and presumably anybody else who has one in their neighborhood. I have no desire to move, but if I had to I'd realize less money on the sale as a result of foreclosures in the neighborhood depressing the prices. If I were to move from Denver to Los Angeles that money would be very dearly missed as I would not have the 20% for a home there.

Speculators aren't the cause they're simply fleas interested in the dog. The cause is simply the bubble that grew out of cheap money, from the fed, to the banks, to the lenders, to the borrowers. Lots of bad ideas came along as a result, because of the appearance that real estate assets always go up. That has proven to be wrong.

Anybody who has owned a home for the last 15 years has benefitted greatly from the asset growth. I complain now, but when I sold my bungalow back in 2002 it was a very sweet, sweet deal that boggled the mind.

Elemenope|7.24.08 @ 1:43PM|#

With that payment Im over 50% equity!!!! I own more than the bank does!!!

Keep on rockin' in the free world, dood.

But seriously, this thing is probably gonna land somewhat short of "I namedrop Baudrillard and ogle the one book of his I own, America, cause it has purty pictures (can't work without purty pictures!), oh and p.s. we're all gonna die!!!" Penn, but I think a little long of "well, only the stupid gamblers will suffer" you.

The contraction of credit supply will effect business expansion, construction, and a few other industries directly, and a few more not as hard indirectly.

It will not be 1929, but it will not be pleasant by any stretch of the imagination.

djyrn|7.24.08 @ 1:44PM|#

I like your dream Pinette, but if it were to come to fruition it would mean many of the price supports that keep housing prices up would be removed. In the long run that would be great. In the short run, we'd call it a bad economy.

ed|7.24.08 @ 1:52PM|#

Fannie Mae lives in an English mansion!
Can you afford to live in an English mansion?

|7.24.08 @ 1:57PM|#

The only price support for home values should be supply and demand. If the Price goes down enough, more people will be able to buy and increased demand will stop the price drop.

|7.24.08 @ 1:58PM|#

In the short run, we'd call it a bad economy.

Don't be ridiculous. In the short run, we'll be living in Obama Nation, and nobody will be calling it a bad economy.

No matter how bad it is.

Taktix®|7.24.08 @ 1:58PM|#

Fannie Mae lives in an English mansion!

But if they fail, how will they pay to have those high windows cleaned? Or the shrubs trimmed? Or the redbricks polished?

Too rich, er... to big to fail!

regarding unemployment figures:

Keep in mind that the "official" figure only reflects people who are applying for unemployment benefits. It does not include people who are perpetually under-employed, nor does it include people who's unemployment benefits have expired.

ed|7.24.08 @ 2:04PM|#

Part of the deal is that Fannie will have to do with fewer maids.
Selling the classic car collection will hurt, though.

Elemenope|7.24.08 @ 2:05PM|#

Don't be ridiculous. In the short run, we'll be living in Obama Nation, and nobody will be calling it a bad economy.

No matter how bad it is.

LOL. This stuff just tickles me...I'm not sure why.

squarooticus|7.24.08 @ 2:05PM|#

The mortgage crisis isn't nearly as big as the oil crisis.

Disagree. Both are actually effects of the same thing.

The mortgage crisis resulted from the popping of a bubble caused by the Fed keeping interest rates low for too long. In general, you can expect bubbles to form when risk (credit) is artificially undervalued.

The oil "crisis" (actually, the general boom in commodity prices, combined with a still relatively small bubble in some of them) resulted from lower relative demand for dollars, devaluing each dollar's purchasing power. This reduction in demand was caused by a combination of inflation, fear of inflation, and changing global economic and political power dynamics. Inflation and fear of inflation result directly from the Fed keeping interest rates low for too long and bowing to political pressure to prevent recessions and finance overspending by the government.

In both cases, the Fed's mismanagement of the currency was a major-if not the major-cause.

|7.24.08 @ 2:09PM|#

Keep in mind that the "official" figure only reflects people who are applying for unemployment benefits. It does not include people who are perpetually under-employed, nor does it include people who's unemployment benefits have expired.

Also, that unemployment by women is routinely underreported because they're more likely to state that they dropped out of the workforce when they have trouble finding a job than men are.

|7.24.08 @ 2:13PM|#

The # 1 employer in the state of California is IHSS. There are hundreds of thousands of employees, the majority of whom I would technically consider unemployed. These are the people that receive a check from the state for providing care for their disabled child, their elderly mother, their blind spouse, etc. These people live in serious poverty (by US standards) But are certainly not counted in the unemployment figures.
BTW, I'm not talking about the disabled folks themselves, who's income is also provided by the government separately and are not counted as unemployed. I'm talking about the able-bodied relatives of the disabled people who receive their income by doing the disabled people's laundry.

classwarrior|7.24.08 @ 2:15PM|#

this problem was created bythe bigbussinessesthat control the government. the ideatheat this is a governmentof the people by tha people and for the peole is ludicrus.

ed|7.24.08 @ 2:16PM|#

"Crisis"? We exaggerate a tad. A crisis would be gas rationing.
And a 30% unemployment rate.
And a stock market that has lost 60% of its value.
We do whine a bit, and forget how bad things could be.

squarooticus|7.24.08 @ 2:19PM|#

Reinmoose, I forgot to finish my thought, which explains why my previous post didn't address your point. :-)

The mortgage crisis would, if left untouched, result in deflation and another Great Depression. As a result, the Fed is feeding inflation back into the system, making the final resolution of the problem that much more extreme. (Imagine a pyramid balanced on one corner getting heavier and heavier.)

The oil price, however, would simply stop rising and might even drop if the Fed managed the currency responsibly: it is rising only because the Fed continues to inflate the currency, and the market is pricing in more inflation to come.

I conclude that the mortgage crisis is much worse because the Fed is damned if they do and damned if they don't.

|7.24.08 @ 2:19PM|#

I see nothing wrong with Barr's answer, though it has a lot of radicals spitting mad (which is near as I can tell their default response). Simply privatizing a heavily distorted market (what we've often seen with utilities "deregulation") is not the answer. The process of privatization has to include some attempt to a) break up government-supported oligarchies like Fannie and Freddie and b) make sure it doesn't result in a chaotic collapse of the market.

That doesn't mean that the long-term goal isn't economic freedom and a dismantlement and/or privatization of Fannie Mae, Freddie Mac, etc.

Nigel Watt|7.24.08 @ 2:24PM|#

Is classwarrior on meth today?

|7.24.08 @ 2:25PM|#

Fannie Mae lives in an English mansion!

On some pricey real estate too. Right across the street from the very tony Sidwell Friends school, where the Clintons sent Chelsea to school.

classwarrior|7.24.08 @ 2:27PM|#

That's real nice, Nigel. When somebody tells you an inconvenient truth, you say that they're on drugs. Typical wingnut answer. I made all those typing errors because I had to type fast to answer the bullshit I've seen on these threads.

Taktix®|7.24.08 @ 2:34PM|#

classwarrior = Al Gore?

|7.24.08 @ 2:36PM|#

classwarrior,
what bullshit exactly were you answering when you claimed the problem is the bigbusinesses that controlthegovernment?
government favoring business interests over the good of the people is a problem all of us discuss and argue against. Many of the people on this thread are providing detailed analysis of the complexities of the situation, and you answer their 'bullshit' by spewing an extremely generalized statement with absolutely no insight.
you sound like you are on drugs.

classwarrior|7.24.08 @ 2:41PM|#

Taktix and Pinette:Why don't you quit with your lame jokes and accusations that I'm on drugs and actually answer the damn argument.

Jordan|7.24.08 @ 2:45PM|#

What is the "damn argument?"

Elemenope|7.24.08 @ 2:45PM|#

classwarrior --

It's nothing to be ashamed of, really. Drugs have long been the scourge of the underclasses. That's what the Man wants, y'know. To keep you down. You gotta get free of that shit. You gotta get clear!

|7.24.08 @ 2:47PM|#

HAHAHAHA, the whole point of my post was that you didn't make an argument, you complete fucking tool!
Bigbizness runsthegovernment is not an argument.

classwarrior|7.24.08 @ 2:50PM|#

Jordan: My argument is that everyone is missing the point of this whole thing. They talk about it as if it were "private sector" versus "public sector" and ignore the important dynamics between classes.

Bill Woolsey|7.24.08 @ 2:50PM|#

The U.S. economy recovered from the Great Depression. But the Great Depression was a poltical disaster for individual economic freedom. I don't know exactly what new sorts of crazed intervention would be introduced if production fell 30% and the unemployment rate approached 30%, but I am not optimistic.

I don't want to suggest that having Fannie Mae and Freddie Mac become insolvent, default on their debts, and liquidation their 5 trillion dollar mortgage portfolios would necessarily cause a Great Depression. It is simply that no libertarian should take a "the Great Depression wasn't so bad," attitude.

A Great Depression was a disaster for economic freedom.

Has anyone read any good articles on handling default and liquidation?

My understanding of the debate is that it has been three way--

1. FM and SM help increase the money going into homeownership. This should conintue.

2. FM and SM should not exist in the long run, but they should continue as before during the current situation to slow the contraction in the housing market.

3. Start downsizing FM and SM now.

While I have seen libertarian hardliners say, "let them fail," I haven't seen any serious analysis of what that would mean.

How long would the 5 trillion dollars (more or less) in debt be tied up before partial payment would be received? Who would determine how fast the 5 trillion worth of mortgages would be sold off? The trustees assigned by the bankrupcy court?

When people speak of who the world would be if there were no FM or SM or how it might be in a world where they no longer exist, that doesn't deal with the question of how to get there.

Penn Bullock|7.24.08 @ 2:52PM|#

MP,

You say: "These aren't banks. These are holding companies."

Well, whatever. They own or guarantee half of the mortgage market. Meaning, they own the homes, or they've repackaged the banks' loans as securities and sold them to foreigners.

Now let me ask you, if America defaults on five to six trillion dollars all of a sudden (nobody's clear about the exact figure), what happens to its precious AAA credit rating? What do you think?

|7.24.08 @ 2:53PM|#

FWIW - Ron Paul speaks to this boondoggle.

No real news...except, fingerprinting of mortgage brokers?!? WTF?

Also worthy to note, the bill just so happens to also raise the country's debt ceiling by 800B. But hey, what's another trillion dollars between friends? I mean, that'll only get you two cheeseburgers in Zimbabwe.

|7.24.08 @ 2:56PM|#

But hey, what's another trillion dollars between friends? I mean, that'll only get you two cheeseburgers in Zimbabwe.

Today maybe. Just wait until tomorrow. It'll buy you maybe one.

classwarrior|7.24.08 @ 2:59PM|#

Reinmoose naother lamejokeaboutZimbabe. He doesn't give a dam that the problems in Zimbabwe are being caused by the western embargo and records droughts that areprobablya linked to climate change.

|7.24.08 @ 3:00PM|#

Meaning, they own the homes, or they've repackaged the banks' loans as securities and sold them to foreigners.

Wha? They own rights to loan contracts on homes. They don't actually own homes. If Freddie dissolves, what makes you think that those contracts no longer have any value? So they have to sell them off. Big deal.

Someone else upthread claimed that selling transitioning these mortgages elsewhere would cause them to be sold at fire sale prices. I disagree with that evaluation. The mortgages retain their value, based on their credit risk and payoff ability, regardless of who owns them. They're contracts over an income stream. That income stream doesn't change regardless of whether Freddie Mac owns the contract or Joe's Bank and Trust.

Elemenope|7.24.08 @ 3:02PM|#

Penn --

It could always borrow at the point of a gun.

After all, if private property is no longer sacrosanct, and the state has a solid monopoly of force...well, I'll let you do the math.

I'd be more worried about the global destabilization that would occur when all those trillions worth of T-bills that other countries hoard suddenly drop in worth by orders of magnitude.

|7.24.08 @ 3:04PM|#

classwarrior, yep, Mugabe has nothing to do with it. It's global warming that's causing 10,000% inflation in zimbabwe.
I think your generalized arguments stem from your paranoid feelings about complex situations that you cannot grasp.

Penn|7.24.08 @ 3:05PM|#

Tarran,

You said: "You admit you have no idea of how Fannie Mae and Freddie Mac integrate into the economy. Yet you confidently perdict what will happen if they go bankrupt."

The more their share prices fall, the more I learn about these corporations.

Sure, I'm ignorant, ill-informed, and ridiculous. But you don't need even an eighth of a brain to suppose that America cannot default on five, six trillion dollars of debt without losing its perfect credit rating and losing lenders in droves. And it's a basic fact of the global economy that America runs on Chinese, Saudi, Japanese, and others' capital. Take the Chinese. We buy their shit in U.S. dollars; they, rather than converting our dollars into their currency, reinvest the dollars in the Treasury. Billions and billions flow in everyday. Do you own a credit card? Three or four, maybe? The Chinese grease that card so that it swipes properly.

And right now companies in China are having to fucking deny that they own bonds in F&F.

One more thing: America can't default on five to six trillion without throwing the global debt market circulation machine into chaos. The debt machine is the shadow economy. You might compare it to the dark matter that keeps the universe from imploding.

Every bank and corporation and many of the citizens of the West are embroiled in the debt market. Did you know? On the debt market, you can pay off your debt by selling debt.

And now the banks are looking to loan money to themselves, because they can't get capital elsewhere and the government is making them deleverage!

|7.24.08 @ 3:09PM|#

Classwarrior, what are the important dynamics between classes that pertain to this discussion?

Rhywun|7.24.08 @ 3:11PM|#

So as a renter, I get to deduct any bailout from my next tax return, right? Right?

|7.24.08 @ 3:15PM|#

Why can't America default on that much debt? The homes would be sold at a loss, but they would be sold. The loss may amount to more than the liquidity, making the companies that backed the loans insolvent. So what? So the investors that had money in those companies lose their money. There is risk involved in investment.
The other option is to prop up the companies with treasury debt, which just makes underlying cause of the current situation that much worse.

Penn |7.24.08 @ 3:20PM|#

MP,

You say: "Wha? They own rights to loan contracts on homes. They don't actually own homes.

Here's a headline on Bloomberg.
"Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders"

If Fannie Mae doesn't own homes, how is it that it owns unsold homes?

" If Freddie dissolves, what makes you think that those contracts no longer have any value? So they have to sell them off. Big deal."

Here's just one reason for believing that the contracts would lose value. If you try to sell five trillion dollars in contracts at one time, supply will certainly overwhelm demand. There won't be enough buyers (or any at all), and so the prices will collapse.

As a matter of fact, the only entity in the world that might even conceive of buying up five trillion dollars in mortgage contracts is, why, the U.S. government! So, hun, you're gonna get government intervention even if they do collapse.

But that's assuming the government can afford five trillion dollars; which it probably can't.

"That income stream doesn't change regardless of whether Freddie Mac owns the contract or Joe's Bank and Trust."

But wasn't this credit crisis caused in part by banks who loaned to people with no proof of income? And you say these mortgage securities are stable because of the income streams.

Uncertainty, baby, it's everywhere!

You still haven't answered my question about America's credit rating...

Bill Woolsey|7.24.08 @ 3:22PM|#

As long as homeowners makes their payments, their home cannot be repossessed to pay off people holding bonds or mortgage backed securities issued by Fannie Mae or Freddie Mac.

The money that is paid on the mortgage would go to different people. (The people who end up owning the mortgage.)

Default means that the stockholders in the FM's are wiped out, and those holding bonds or mortgage backed securities issued by the FM's receive partial payment.

It is true that foreigners own many of these and so, would take a loss. Receive only part of their money back.

"M" claims that there would be no fire sale losses...because.... If the FM's were small relative to the market and capital markets were perfect, then it would work just like he said. In reality, capital markets are imperfect, but that really isn't the issue. It is that the FM's are large relative to the market.

Taktix®|7.24.08 @ 3:23PM|#

classwarrior,

I would address your argument when I can actually discern what said argument is from your rambling, incoherent posts.

In high school, did you turn papers in like that? No wonder you never finished...

Penn |7.24.08 @ 3:24PM|#

"Why can't America default on that much debt?"

Because if we do, we won't get the billions of dollars needed everday to run the indebted corporations, charge up credit cards and dole out auto loans and home loans. The mortgage market would quit functioning, and so would the enormous credit apparatus that rains money down on this population of negative savers and debtors.

Penn |7.24.08 @ 3:27PM|#

Elemenope,

You said, "I'd be more worried about the global destabilization that would occur when all those trillions worth of T-bills that other countries hoard suddenly drop in worth by orders of magnitude."

Yes, exactly.

|7.24.08 @ 3:29PM|#

There are other sources of credit that are more sound. I suspect rates would go up quite a bit, but the whole credit market would not collapse.
We'd likely even start to get back to an era of sanity where people and corporations don't generally spend more than they make.

|7.24.08 @ 3:31PM|#

The contraction of credit supply will effect business expansion, construction, and a few other industries directly.

Right, lenders will only be willing to finance projects that are more justifiable and less speculative than they have in the past.

|7.24.08 @ 3:33PM|#

"Fannie Mae Unsold $5 Billion Homes Bring Peril to Shareholders"

That's foreclosure inventory. Why don't you RTFA instead of just the headline.

"M" claims that there would be no fire sale losses...because.... If the FM's were small relative to the market and capital markets were perfect, then it would work just like he said. In reality, capital markets are imperfect, but that really isn't the issue. It is that the FM's are large relative to the market.

I didn't say they wouldn't be sold at a discount. A "fire sale" implies a substantial discount. There wouldn't be a substantial discount, because there is too much underlying value. And the discount in the CDOs is due to unknowns regarding default rates.

Everyone who owns mortgage related assets in their portfolio is going to take a hit, because a higher than normal portion of the mortgages will need to be written off due to foreclosure. And that's because you buy into bundles of mortgages. Thus, the portfolio will sustain losses. But all of the sound mortgages within the portfolio remain sound, regardless of who owns them.

|7.24.08 @ 3:35PM|#

You mean lenders would actually have to perform due diligence? gasp!

squarooticus|7.24.08 @ 3:39PM|#

There wouldn't be a substantial discount, because there is too much underlying value.

How much of that value will be destroyed when too much inventory hits the market at the same time? At what point does it become a fire sale? 10%? 25%? 50%?

Penn |7.24.08 @ 3:41PM|#

Elemenope:

"I namedrop Baudrillard and ogle the one book of his I own, America, cause it has purty pictures (can't work without purty pictures!), oh and p.s. we're all gonna die!!!"

I resent being dragged into a dick-size competition like this, but I can't resist when I have the bigger dick.

Here's a list of the Baudrillard works I own, in order of my purchase (or shoplifting) of them:

Impossible Exchange
America
Simulacra and Simulation
Seduction
The Perfect Crime
Screened Out
Fatal Strategies
Paroxysm

I've read every one of those books, and I'm always rereading several. I've also read some of his collections of aphorisms on Google Books. I'm right now wading through the essays he penned in the 00s, many of which are uncollected.

I'm a Baudrillard nerd. Debate Baudrillard if you like, but do more than impugn me stupidly, please.

Penn |7.24.08 @ 3:43PM|#

MP,

You say, "That's foreclosure inventory. Why don't you RTFA instead of just the headline."

Alright, then.

"Together, Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance companies, OWNED a record $6.9 billion of foreclosed homes on March 31, compared with $8.56 billion held by all 8,500 U.S. commercial banks and savings and loans. Foreclosed houses sell at an average discount of about 20 percent, according to economists Ethan Harris and Michelle Meyer at New York-based Lehman Brothers Holdings Inc. At that rate, the two mortgage companies stand to lose $1.39 billion on the foreclosed houses they currently OWN."

Penn |7.24.08 @ 3:44PM|#

MP says, "But all of the sound mortgages within the portfolio remain sound, regardless of who owns them."

Yes, and nobody knows who does.

Russ 2000|7.24.08 @ 3:46PM|#

These aren't banks. These are holding companies.

Not yet, anyway.

ed|7.24.08 @ 3:49PM|#

More details of the deal are being released.
Fanny Mae is being forced to vacate her swell digs for this place.

Penn |7.24.08 @ 3:50PM|#

Maybe someone should write about this:

http://www.thetrumpet.com/index.php?q=5349.3644.0.0

|7.24.08 @ 3:50PM|#

Penn, it sounds like fm/fm stand to loose 1.39 billion then. This is a far smaller number than the 5 trillion in total contracts.

|7.24.08 @ 3:52PM|#

I am not an economist or a politician. Maybe I can make sense of all this. The wealth is in the real estate, houses, ranches, whatever. When somebody defaults on a loan, the real estate does not go away, it changes hands. If enough default the valuse of all real estate falls because the is now an over supply, prices come down, and different people buy those houses that have not shrunk one bit.

I fail to see that cheaper (relatively) homes is a bad thing. I fail to see that the stockholders of Fannie and Freddy losing their investment as all that horrible either. When you play the game, sometimes you lose. That's why people have diversified portfolios.

I see a market correction and some lessons being learned, a small bonanza for property managemnet firms, cheaper homes for those who are presently renting, and bad credir reports for those who bought shit they couldn't afford. There will be losses for people who lent money irresponsibly, but that's what happens in a free economy. The construction industry can expect to take a hit as well. It's not like they were asking to be taxed extra while the bubble was growing and they were building as fast as they could.

Them houses ain't going anywhere, and the best thing the feds can do is not offer the effin' Fs (Fannie and Freddie) another dime.

Unless of course you expect half of all mortgages in the country to default.

They won't.

|7.24.08 @ 3:56PM|#

JsubD,
I'm not exactly an economist either, but it is my job to analyse housing markets.
Seriously, you are correct and it really isn't that much more complicated than that.

|7.24.08 @ 3:57PM|#

Unless of course you expect half of all mortgages in the country to default.

They won't.

Of course not. Most people are responsible and conservative to a fault when it comes to a home purchase. It's not an money making investment, it's a place to live and raise a family. They weren't going to sell anyway so if the price goes down (or up) the effect on those people is only psychological. They'll get over it.

*analyze
sheesh, an analyst really shouldn't be spelling that word wrong.

|7.24.08 @ 4:08PM|#

Penn,

If you don't understand that a lender will end up owning the underlying asset when the borrower defaults on their loan, then you have no business commenting on this thread. The fact that these GSEs are sitting on a large pile of foreclosed property is an entirely separate discussion from how to deal with re-selling their mortgage inventory, which is an inventory of contracts involving real estate assets, not actual real estate assets. The actual assets are owned by the...wait for it...people who bought the property and took out a loan to do so.

squarooticus,

Selling CDOs is not strictly an issue of supply and demand. You're selling rights to cash flow. How much those rights are worth are based on how viable you think the cash flow is. If a huge supply of rights to cash flow suddenly hits the marketplace, it doesn't instantly devalue the cash flow. The discount involved in reselling the CDOs is that it's hard to generate a good risk assessment as to how viable the cash flow is. It's not simply because there are a lot available.

Consider this...if I have 10 paper bags, each filled with between $50 to $100, but the actual amount is unknown, and I sell them on eBay, the price of each will be based on the odds that they contain a particular denomination. Now, if I sell 1,000,000 of those bags, does the price change? No. I just need to find a lot more buyers.

Penn |7.24.08 @ 4:09PM|#

J dub D,

"I fail to see that cheaper (relatively) homes is a bad thing. I fail to see that the stockholders of Fannie and Freddy losing their investment as all that horrible either."

Ugh, this is a crazy statement.
First, the stockholders have already lost. F&F have deserted something like 90% of their respective share values since Sep07.

Freddie Mac lost almost 20% just today.

Second, the losses from a full-scale default on five trillion would go way, way beyond the stockholders. What about bondholders? What about the banks that sold their mortgages to F&F so they could take them off the balance sheets?

And nobody's factoring in something else. Americans have been spending like crazy off home equity. During this house bubble, they leveraged their homes. If home prices fall even more precipitously in case of an F&F meltdown, equity will cease to exist in any effective quantities.

The possibilities for disaster here are not fully imaginable. Don't believe me? Fine, believe him:

"Ron Paul: Some Big Events Are About to Occur"
http://infowars.net/articles/july2008/170708Paul.htm

Penn |7.24.08 @ 4:16PM|#

MP,

I'm trying to disentangle what you just said. So F&F own the mortgage if the house is in foreclosure, but they don't if the residents are paying the bills?

Well, it's always been my understanding that the bank owns the home till the loan's settled.

About reselling the assets, you say supply and demand doesn't matter. But where the hell will demand come from if the banks are in meltdown and the foreign countries are calling in loans? And who the fuck can afford five trillion dollars in CDOs?

Don't you think the government, the hated government, will just end up intervening to buy the assets, thereby distorting the marketplace?

|7.24.08 @ 4:17PM|#

Second, the losses from a full-scale default on five trillion would go way, way beyond the stockholders

Listen...THIS WOULD NOT HAPPEN. This would only happen if every single mortgagee with a GSA sponsored mortgage STOPPED PAYING THEIR MORTGAGE. This is about as likely as the Earth being hit by an NEO in the next half hour.

Duck!

squarooticus|7.24.08 @ 4:18PM|#

MP:

Selling CDOs is not strictly an issue of supply and demand. You're selling rights to cash flow. How much those rights are worth are based on how viable you think the cash flow is.

The problem is that foreclosed homes have zero cash flow. Compounding this is that dumping a bunch of them on the market at once to restart the cash flow reduces the amount of money that can be commanded for each.

Consider this...if I have 10 paper bags, each filled with between $50 to $100, but the actual amount is unknown, and I sell them on eBay, the price of each will be based on the odds that they contain a particular denomination. Now, if I sell 1,000,000 of those bags, does the price change? No. I just need to find a lot more buyers.

Epic fail. (I think that's the first time I've used that term seriously.) This is not a proper analogy. $50 and $100 will always be worth $50 and $100 (though the purchasing power of each $1 will... ah, "vary" over time). A proper analogy would be that a house is always worth a house, but the connection between a house and a dollar value isn't quite as clear cut as the connection between a dollar value and a dollar value.

|7.24.08 @ 4:22PM|#

"This strikes me as a classic example of intervention's inescapable logic: We broke it, so we bought it, and now it's too big to fail, even though it all sucks in the first place."

In a way, that more or less seems to be the operating assumption in Healthcare and Education, too.

|7.24.08 @ 4:27PM|#

So F&F own the mortgage if the house is in foreclosure, but they don't if the residents are paying the bills?

Close. Owning the mortgage, which is a contract, is not the same as owning the house, which is a physical asset.

Well, it's always been my understanding that the bank owns the home till the loan's settled.

Yes, you've always misunderstood.

And who the fuck can afford five trillion dollars in CDOs?

Yes, that transference isn't as straightforward as selling a Coke at the corner market. That's why dissolving the GSEs will take some effort. And whatever doesn't get sold will likely be held onto by the government until the contracts come to term. But that effort, which will involve some people (including DC) eating some major write-downs on their books, does not equal defaulting on debt and a worldwide economic meltdown.

Penn |7.24.08 @ 4:31PM|#

MP,

"Listen...THIS WOULD NOT HAPPEN. This would only happen if every single mortgagee with a GSA sponsored mortgage STOPPED PAYING THEIR MORTGAGE. This is about as likely as the Earth being hit by an NEO in the next half hour."

There are five trillion dollars in liabilities, and if the two companies fail, somebody will have to assume those liabilities. If the government doesn't, the liabilities will sit in a state that I probably incorrectly called default.

|7.24.08 @ 4:36PM|#

The problem is that foreclosed homes have zero cash flow.

So what? You're not selling foreclosed homes. Your selling packages of mortgages, and those packages have variable (but currently increasing) default rates.

$50 and $100 will always be worth $50 and $100

$50 and $100 were the upper and lower ends of the range of values. The actual amount in the bag might be $72.50. The range in my example correlates to the value of the mortgages. A 0% default rate is $100. A 50% default rate is $50. The actual (but very hard to predict at present) default rate determines the market price of the paper bag. When you buy the bag, how much money is in it is determined by the default rate. But no matter how many bags are sold, you're still selling dollars.

squarooticus|7.24.08 @ 4:41PM|#

The actual (but very hard to predict at present) default rate determines the market price of the paper bag.

Ah, that explains the apparent failure of the analogy: we are talking past each other. I was referring to actual foreclosed homes that need to be resold, while you were referring to packages of mortgages.

|7.24.08 @ 4:42PM|#

There are five trillion dollars in liabilities, and if the two companies fail, somebody else will have to assume the responsibility of acting as the transfer agent between the mortgagees and the lien holders of those liabilities.

There. Fixed.

Rhywun|7.24.08 @ 4:58PM|#

Fanny Mae is being forced to vacate her swell digs for this place.

Hey, that looks just like the dorms at my college.

|7.24.08 @ 5:17PM|#

"Ugh, this is a crazy statement."

Why, Penn?
Home prices going down may not be great for current homeowners, but if the equity they had was based on overinflated value, then getting back to reality IS a good thing. And an economy that relies on people spending their home equity is NOT healthy. I'd rather live in a world where the money available to you is the money you earn on your own merits. The real benefit from lower home prices should be obvious. LOWER HOME PRICES. More people able to afford housing. Pretty simple stuff there.

"Second, the losses from a full-scale default on five trillion would go way, way beyond the stockholders. What about bondholders? What about the banks that sold their mortgages to F&F so they could take them off the balance sheets?"

This is the real crazy statement. I think it has already been explained why a 'full scale default of five trillion' isn't going to happen. But why do you even bring up banks that sold their mortgages to f&f? I don't get that. Are you saying that it will be disastrous if banks no longer have an automatic buyer of their loan bundles? GOOD! maybe private banks will get back into the habit of writing good loans that can be justified by mutual benefit of both the lender and the borrower.

squarooticus|7.24.08 @ 5:29PM|#

Are you saying that it will be disastrous if banks no longer have an automatic buyer of their loan bundles? GOOD! maybe private banks will get back into the habit of writing good loans that can be justified by mutual benefit of both the lender and the borrower.

Pinette FTW.

Elemenope|7.24.08 @ 7:13PM|#

I'm a Baudrillard nerd. Debate Baudrillard if you like, but do more than impugn me stupidly, please.

Well, it was for the inane dismissal about nine threads down. I admit I could have been kinder about my...difference of opinion with you regarding the thrust of Baudrillard's work.

But I did not impugn stupidly. Can you not grok the joke about images (especially in America) being that which is most important in the text, insofar as they displace and degrade the text (and the reader)? That was impugning sharply! :)

From one Baudrillard geek to another, no hard feelings.

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