I Say Re-Regulation, You Say Deprivatization

New York Times economics-and-politics columnist Paul Krugman gets all post-modern on the re-regulation of the U.S. housing market.

Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen.

So what we're really seeing now is deprivatization. It's not something like the UK government seizing the steel mills; it's more like firing Blackwater and giving responsibility for diplomatic security back to the Marines.

This is, I think, a neat encapsulation of the mindset that may just be on the verge of re-taking Washington. Some things, alas, are just too important to be left to the market. Like, um, bank lending.

Barack Obama approves the Bush Administration's message here, though at least he adds this to-be-sure:

In our market system, investors must not be allowed to believe that they can invest in a 'heads they win, tails they don't lose' situation.

Comments

[sage]

Barack Obama apporves the Bush Administration's message

Did you mean to type "abhor?"

[R C Dean]

I actually agree with Barack's sound bite, although, to be sure, under his promised increase in cap gains rates, he really favors "heads they don't win much, tails they lose".

[Me]

Among the things that actually had a chance of happening, this may be the least bad. That is, until that whole "reducing the portfolio by 10% a year" thing flies out the window after the election.

[Robert]

If bailouts are understood to be inevitable, it probably is best to take the reins. It's probably wishful thinking to think that this generation would allow massive failures. If we had a dictator on our side it could be done, but democracy, paradoxically, doesn't allow a chance for a truly free market.

[JMR]

So when it becomes TOTALLY obvious that public "ownership" in the form of implied insurance doesn't make sense, it's time to claim that private ownership doesn't make sense? Wow. Welcome to Wonderland, Alice!

[Warren]

We are so fucked.

[Hugh Akston]

The Times has a point. Those steel mills were probably wholly-owned private companies at one point. Fannie and Freddie were always grotesque public-private chimeras, aptly described as a crisis waiting to happen.

[Matt Welch]

Did you mean to type "abhor?"

Thanks, fixed, and sorry.

[SugarFree]

he really favors "heads they don't win much, tails they lose".

If it's their primary residence, they won't have to pay capital gains anyway.

The bail-out is more like: "Heads they win a tax-payer supported home, tails we give them another coin and let them try again and again and again..."

[Kant feel Pietzsche, my Balzac]

DISCLAIMER: I do not intend to vote for either side of the tarnished coin known as McBama

Did you check the video response from BHO? He complained that his critics were ignoring the "work" he did in the state senate. I just thought that was rich.

[robc]

http://www.house.gov/paul/congrec/congrec2003/cr091003.htm

Just in case some of you hadnt seen it.

[vanyali]

This didn't have to happen. If the gov't didn't like people thinking they were backing the debt, they could have, um, not backed the debt. Let the GSE's buy fewer mortgages, borrow at higher rates, let markets work, and let the companies be private. After all, the companies didn't fail, the government just decided that they might fail sometime in the future if market conditions keep worsening. If if if.

[too many steves]

The way I see it, downside risk is the control on irresponsible behavior, thus, if you remove the risk you remove the control. Bailing out the investors in Fannie Mae and Freddie Mac proves the judgment of those investors that there was insufficient risk, in the operating behavior of those institutions, to force a change in behavior & policies.

You reap what you sow...

[Episiarch]

In our market system, investors must not be allowed to believe that they can invest in a 'heads they win, tails they don't lose' situation.

It's "heads I win, tails you lose". If Obama can't get a stupid joke right, he loses my vote which he never had in the first place.

[J sub D]

Give me a break. I find the stupidity of the statists on this just astounding.

The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Mortgage Corporation, nicknamed Freddie Mac, have operated since 1968 as government sponsored enterprises (GSEs).

Correct me if I'm wrong here, home loans were made, and in fact were quite common, prior to Johnson's Great Society crap*.

Oh noes! State involvement directly resposible for creating unsound business practices can only be corrected by - wait for it - more state involvement. So sayeth Paul Krugman, idiot.

This is so wrong on so many levels I'm livid.

* Did I ever mention that I place LBJ in the bottom five of US presidents?

[SIV]

If Obama can't get a stupid joke right

Out of touch elitists with no substance never get jokes right. Axelrod or Favreau wrote it correctly and Obama screwed up the recitiation

[JMR]

robc said:

http://www.house.gov/paul/congrec/congrec2003/cr091003.htm

So, someone who must not be named told 'em so in 2003 (and no doubt before)? Color me unsurprised.

[sixstring]

Epi-

I think Obama meant it as he said it.

[Old timer]

Glad to see the Gov is finally getting things right, just as Japan did in 1990. Warm up the printing presses, easy to add zeros. Zeros ain't nuthin' anyway.

[anonymous]

Epi, pretty sure he's complaining about the bailouts as the government allowing investors to invest knowing the government will bail them out if it goes south.

i.e. Heads I win, tails I don't lose. Exactly like he said it.

[robc]

J sub D,

Im having trouble coming up with 4 other that bad.

[joe]

No, Obama must have blown the joke. This must be true, because SIV says so.

Even though he was talking about rigging the game so investors can win but not lose, he must not have meant "heads you win, tails you don't lose."

Because...you know...teh elitist.

[R C Dean]

he really favors "heads they don't win much, tails they lose".

If it's their primary residence, they won't have to pay capital gains anyway.

Well, sure, but he wasn't talking about home-owners, he was talking about investors. My snark stands as written.

[SIV]

joe,

So maybe Obama correctly recited the script?

Give him a cookie ! Or a cigarette !

[joe]

I'm pretty sure investors managed to win a pretty good amount under the 90s-era capital gains rate.

[R C Dean]

I can see why Obama would be reluctant to use the more traditional formulation "tails you lose."

Tax 'n' spend types don't really want to be reminding people that massive outlays of money by the government = taxpayers losing, after all.

Still, its not like his daughter is pregant or anything, so I give him a pass on that one.

[whiskeytango]

BO probably knows the old saying; it was altered on purpose in this case.

And FNMA was not created by LBJ, it was actually created by FDR as part of the New Deal. FHLMC was an LBJ creation. And yes, mortgage loans were made prior to these entities, just not nearly on the same scale. Executed properly, they provide liquididty back to the market, making funds available for new loans. Which creates massive opportunities in Real Estate, Lending, Construction, etc. Executed improperly, well, you have what we have now.

[joe]

So maybe Obama correctly recited the script?

Oh, I get it. Heads you win, tails I lose.

At least you're not shilling so hard that there is no possible outcome that makes Obama look good.

[joe]

Executed properly, they provide liquididty back to the market, making funds available for new loans. Which creates massive opportunities in Real Estate, Lending, Construction, etc. Executed improperly, well, you have what we have now.

The people complaining on this thread don't care if they're executed well or poorly. They object to them even when they work well.

Personally, I think people not caring whether they work well or not is part of why they haven't been working well.

[Jerry]

Krugman is wrong about deprivatization, since one feature of private companies is that they ought to be able to go legally bankrupt.

[joe]

Krugman isn't talking about truly private entities, Jerry. He's talking about that hybrid, the privatized government function.

[Jerry]

And saying that Fannie and Freddie are nationalized is even dumber. Nationalization would put them on the government's balance sheet, which has not happened as of yet. In fact, the government can just erode shareholder's equity, and start shrinking the companies and selling their assets.

[Dagny T.]

Reading Krugman usually causes me to have an aneurysm and this is no exception. He's been beating the "markets don't work" drum for a looong time.

[J sub D]

Nobody corrected me. So I guess that mortages were granted by banks and repaid quite often without Freddie and Fannie.

Take them behind the barn and shoot them already.

[The Angry Optimist]

Personally, I think people not caring whether they work well or not is part of why they haven't been working well.

If we all just BELIEEEEEEVE, government can make us taller, stronger, smarter and the Proud Owner of a Pony.

[SugarFree]

J sub D,

The government is rarely needed to help the competent. Without the government, fools, wastrels, and the lazy might go extinct and besides them who supports the government? Bailing out the incompetent is a rational act of survival for the government.

[Jerry]

@joe
Which is oxymoronic language of Krugman. He uses this terminology to put the blame somewhere else than where it really belongs.

[PapayaSF]

Krugman's analogy is amusing because he doesn't seem to to be aware why Blackwater was hired for diplomatic security. AFAIK, it wasn't because of free-market ideologues in the Bush administration, it was at the insistence of State Dept. types who didn't want their rivals in the Defense Dept. doing the job.

[Episiarch]

Uh, dudes, I was making a joke. I'm fully aware that Obama was making a specific point. But hey, let's take everything about this election super-serial why don't we.

[joe]

Jerry,

Paul Krugman did not invent the term "privatized." He did not define "privatization." It's an objective term refering to a well-understood practice.

So I guess that mortages were granted by banks and repaid quite often without Freddie and Fannie. And there were profitable private enterprises before the American revolution, too. Fannie and Freddie exapanded the number and availability of mortgages, as well as ending (along with other horriffic, immoral agreesions like the FDIC) the frequent bank runs and panics that used to be such a regular feature of the American economy. Imagine, a few mortgages doing delinquent not causing everyone in the bank to lose their savings. The horror. The horror.

Oh, well. At least nobody was prevented from taking advantage of the backstopping by issuing wholly implausible mortgages.

TAO, thank you for demonstrating the mindset perfectly. You don't need any facts or even any knowledge about the issue. Da gubmint is bad, and if you think harder about questions, that's just like a cult.

[Dagny T.]

But hey, let's take everything about this election super-serial why don't we.

Excelsior!

[Episiarch]

"Manbearpig must be stopped!"

[Hugh Akston]

joe,

Since you seem to be on the "keep FM/FM alive at any cost" bandwagon, pray explain something.

Why is it better to make me (the taxpayer) cover the risky lending practices of banks that I have no stake in? I think this would have been a great opportunity to let those institutions implode and let banks cover their own asses.

[JMR]

Hugh, IMO that may yet happen (or may have effectively happened last weekend) but the point of these interventions is to delay that moment when shit hits fan blades & Ron Paul's fans all say, "I told you so" at once until AFTER the election.

[Jerrry]

@joe
So when AEI calls for privatization of these entities in 2004 these terms have the same "objective" meaning?!

[Gilbert Martin]

"Private ownership of Fannie and Freddie never made any real sense, and was always a crisis waiting to happen."

It's more like the creation of entities like Fannie Mae and Fredie Mac by the government in the first place never made any sense and was always a crisis waiting to happen.

[Gilbert Martin]

"In our market system, investors must not be allowed to believe that they can invest in a 'heads they win, tails they don't lose' situation." - B Obama

But all the democrat's favored constituency groups should be led to believe that the market system is "unfair" and that the government is going to redistribute wealth via tax policies, expanded entitlement programs and other mechanisms to effectively give them a handout of other people's money.

[Naga Sadow]

Is that a pig . . . bear . . . man?

[Paul]

They object to them even when they work well.

Personally, I think people not caring whether they work well or not is part of why they haven't been working well.

Bingo. Because we don't care about what we don't own. And there's a bailout at the end anyway. So why are we trying so hard to get this right?

[J sub D]

And there were profitable private enterprises before the American revolution, too.

Dunno what the hell that statement is supposed to mean. Was the Ameerican revolution over economic principles? We changed what exactly economically after the victory?

Fannie and Freddie exapanded the number and availability of mortgages,

Obviously given to many who are unable to repay their obligations ... Maybe there was a reason that those mortgages wouldn't otherwise have been granted.
... as well as ending (along with other horriffic, immoral agreesions like the FDIC) the frequent bank runs and panics that used to be such a regular feature of the American economy.

Freddie and Fannie have have beenn helping avoid bank runs? You did read something about Bear Stearns, didn't you? Perhaps Freddie and Fannie had a part in the whole subprime mess. Ya think? Maybe?

Imagine, a few mortgages doing delinquent not causing everyone in the bank to lose their savings. The horror. The horror.

A few delinquent mirtgages causes bank collapse? A shitload of delinquent mortgages that should never have been made does that. Of course if the government is going to back you up, lend the fuck away.

Imasgine loan default risks being a primary consideration by the lenders. The horror, the horror.

[Geotpf]

Episiarch | September 8, 2008, 11:15am | #

In our market system, investors must not be allowed to believe that they can invest in a 'heads they win, tails they don't lose' situation.

It's "heads I win, tails you lose". If Obama can't get a stupid joke right, he loses my vote which he never had in the first place.

The situation isn't "heads I win, tails you lose". It is more like either they win or they break even (with no outright losing), exactly like Obama described it. That is, either the stock goes up (they win), or the government covers their losses (but they make no profit-they don't lose, but they don't win either).

[Elemenope]

All you fuckers have ensured that *forever more* when someone uses a coin metaphor, I will throw up a little in my mouth.

I already don't watch sports cause of this sort of shit.

[Max]

Thanks for the Ron Paul link. Of course, he wasn't the only one who saw this coming. This disaster was predictable and avoidable.

[Paul]

Mark Zandi, chief economist at Moody's Economy.com predicted that 30-year mortgage rates, currently averaging 6.35 percent nationwide, could dip to close to 5.5 percent. That's because investors will be more willing to buy the debt issued by Fannie and Freddie - and at lower rates - since the federal government is now explicitly standing behind that debt.

"Effectively, the federal government has now become the nation's mortgage lender," he said. "This takes a major financial threat off the table."

Taking the financial threat out of lending mortgages.

I know I feel better...

http://seattletimes.nwsource.com/html/businesstechnology/2008161349_apmortgagegiantscrisis.html

[sage]

The people complaining on this thread don't care if they're executed well or poorly. They object to them even when they work well.

Right! Like...when?

[Bruno]

When they say that "the Feds are taking control of Fannie Mae and Freddie Mac" they would love for you to assume that they mean the Federal Government. What they actually are telling us is that the Federal Reserve is taking over these banks, and the Federal Reserve is as far from the Federal Government as Federal Express is.

The Federal Reserve is a private corporation that runs our economy in absolute secrecy. They create all the ups and downs of our economy on purpose, and they capitalize on it every time because they know what is going to happen.

They created the housing market crash and they are capitalizing on it right in front of all of us. Google video "Money Masters"

[J sub D]

When they say that "the Feds are taking control of Fannie Mae and Freddie Mac" they would love for you to assume that they mean the Federal Government. What they actually are telling us is that the Federal Reserve is taking over these banks, and the Federal Reserve is as far from the Federal Government as Federal Express is.

From here. This is not the federal reserve taking control of the FMs.

Officials announced Sunday that both Fannie Mae and Freddie Mac were being placed in a government conservatorship, a move that could end up costing taxpayers billions of dollars.

Treasury Secretary Henry Paulson refused to estimate how much the takeover of the two companies will cost the government, but he insisted that taxpayers will get paid back first.

The Federal Reserve is a private corporation that runs our economy in absolute secrecy. They create all the ups and downs of our economy on purpose, and they capitalize on it every time because they know what is going to happen.

I can only add that the Freemasons and International Jewry is behind all of it.

They created the housing market crash and they are capitalizing on it right in front of all of us.

You do realize that somewhat conflicts with "The Federal Reserve is a private corporation that runs our economy in absolute secrecy"?

Google video "Money Masters"

Uhhh, no thanks.

[Gilbert Martin]

"I can only add that the Freemasons and International Jewry is behind all of it."

Well they're only part of the conspiracy.

The Klingons are hiding on the dark side of the moon waiting to strike after our economy has been sufficiently destabilized that it destroys the will of the people to resist.

[R.J. Lehmann]

Look, I don't like the takeover more than anyone else here, but there are certain facts that much be reckoned with. Among these are, saying the GSEs had only the "implicit" backing of the Treasury is weak sauce. When Treasury officials were dealing with foreign central banks -- particularly the Chinese and Japanese -- the backing was always very much explicit. GSE paper was marketed as just as good as Treasury paper. To allow them to default without honoring that backing would be, effectively, a massive fraud with implications that reverbate not only through the global markets, but throughout international relations more generally.

Second, though I haven't seen the Morgan Stanley report, given HOW badly Paulson et al wanted to punt this problem to the next administration, I have to believe what it showed was that things were far more dire than the agencies let on. The word is that Freddie was simply not marking distressed assets to market, period.

And finally, there are a LOT of problems with the GSE model, but to blame it for the agencies taking on excessive risk is disingenuous. Fannie and Freddie had HIGHER lending standards than the crap Lehman and Bear were bundling in securities. They also were the victims of a lot of fraudulent lending that was passed on to them by the likes of Wachovia, WaMu and IndyMac. If you want to cast the blame at excessively loose monetary policy, I'm with you. But saying the GSEs would have been careful and cautious had only they been fully private entities is bullshit. It's more likely they would have chased the same returns on what turned out to be toxic lending that everybody else was. They just wouldn't have been nearly as big.

[sb]

(off on a tangent...) While Marine Security Guards are integral to the security of US missions abroad, "diplomatic security" is the purview of the State Department's Bureau of Diplomatic Security, aka the Diplomatic Security Service.

[Paul]

And finally, there are a LOT of problems with the GSE model, but to blame it for the agencies taking on excessive risk is disingenuous. Fannie and Freddie had HIGHER lending standards than the crap Lehman and Bear were bundling in securities.

Speaking for Bear, they received a bailout as well. So again, what's the incentive to not take "excessive risk"?

[JB]

It would be nice if a writer did his research. Marines aren't responsible for diplomatic security. They may guard the US soil that the embassy sits on, they do not do bodyguard work. They do what they are trained to do; locate, close with and destroy the enemy with overwhelming firepower. Innocent Iraqi civilians, never met one...