by Damozel | Much speculation yesterday about the government's plans for Freddie and Fannie and what those policies would mean. The Treasury Department has now unveiled its four-point plan for Freddie and Fannie.
The Treasury Department on Sunday seized control of the quasi-public mortgage finance giants, Fannie Mae and Freddie Mac, and announced a four-part rescue plan that included an open-ended guarantee to provide as much capital as they need to stave off insolvency. (NYT)
Paulson's statement is here. Among other things, he said:
Through the four actions we have taken today, FHFA and Treasury have acted on the responsibilities we have to protect the stability of the financial markets, including the mortgage market, and to protect the taxpayer to the maximum extent possible.
And let me make clear what today's actions mean for Americans and their families. Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. This turmoil would directly and negatively impact household wealth: from family budgets, to home values, to savings for college and retirement. A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance. And a failure would be harmful to economic growth and job creation. That is why we have taken these actions today. (Press Release; emphasis added)
Atrios remarked that the specifics still seem fairly nonspecific. ""Who eats how much shit" is the big question and it isn't entirely clear." To which Afferent at economics blog Angry Bear riposted: "As the old saying goes, if you're sitting at a table, and you don't know who gets to eat how much shit, guess who gets to eat the most." These economists and their technical jargon....!
Secretary Paulson also said:
“Government support needs to be either explicit or nonexistent, and structured to resolve the conflict between public and private purposes,” Mr. Paulson said. “We will make a grave error if we don’t use this time out to permanently address the structural issues presented by the G.S.E.’s,” he added, a reference to the companies as government-sponsored enterprises.
Obama seems to have spoken recently along similar lines. As you'll recall....
Obama derided Fannie and Freddie as a “weird blend,” advocating that “If these are public entities, then they’ve got to get out of the profit-making business, and if they’re private entities, then we don’t bail them out.” He said later that he has “no sympathy” for the CEOs of Fannie and Freddie, and that the government shouldn’t bail out “investors who had made a killing.”(WSJ)
Obama also said:
"We have to make clear that in our market system, investors can't be allowed to believe that, unlike working families, they can simply invest in a heads-they-win, tails-they-don't situation....
"Management was not making decisions that were designed to help them meet what should have been the mission, which is simply to provide liquidity in the housing market," he said. "They were boosting profits as a priority, with the management bonuses that came with those profits." (LAT)
Meanwhile, McCain wants to keep people in their homes, while restructuring the system. He also wants "more government oversight" and more regulation along with "a reduction in what they do."(NYT) He grasps that the executives of these institutions were "were making hundreds of — hundred some billion dollars a year, while things were going downhill, going to hell in a handbasket."(NYT) As a Republican, he seems to think privatization is ultimately the solution.. I get the impression, frankly, that his grasp of the situation is about as good as mine. Baby steps...baby steps.
The Bush administration and others have long been arguing that Freddie and Fannie were riding for a great fall with only the thinnest of cushions. Furthermore, they've seen the mortgage giants as "systemic risks" because of it. (NYT) I guess they couldn't stop it from happening? I don't know. I'm no economist.
Paulson ain't saying how much money the taxpayers are going to have to provide to them: "tens of billons," certainly---the total to depend on how fast the market recovers.(NYT)
What, finally, is the long-term application of all this to you and me, who were just going about our business, trying to ensure we could pay our next month's expenses?
Stormy at Angry Bear provides "the broader view," where "broader"---to the ignorant layman as well as the informed economics expert---equates with "yikes." I am not sure where the excerpt is from (?), but it seems to sum up everything I've read during the last few days. I'm not going to paraphrase because it's too good and too trenchant to reframe.
In pertinent part, it says:
Once again, the U.S. taxpayer will be asked to shoulder another mountain of debt. Once again, the taxpayer has become the prop of last resort as poorly managed entities become too big to fail. How long this can continue is the question....
And how does the next president reassure our foreign creditors that the U.S. will pay its bills?(Angry Bear)
This seems to be the key question.
While we may be dismayed that foreign central banks will receive "government backing," we do not have much choice.
Yu Yongding, former advisor to China's central bank, put the matter bluntly:``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''....
If foreign central banks stop financing U.S. debt (there are no free rides), then the U.S. is in a world of hurt.....For the U.S., the consequences may be immediate inflation as Treasury attempts to makes its offerings more palatable. The dollar will plunge. And these are just for starters.
The party is over. Sorry that most of you working stiffs missed it. Oh, by the way, here's the bill. (Angry Bear; more; emphasis added)
Pause for hollow laughter and to consider just how little I understood exactly the nature of the threat. I've known Freddie and Fannie my whole life. Have our financial institutions all along been behaving like freebooting privateers and plunderers, bent on depredation?
Although the American public is not exactly happy with the economy, it has no idea of the depth of the problems. Most people think the government's check writing ability is infinite.
Well, the government is broke and broken.(Angry Bear; more)
There's also a pause to look at the candidates and their failure to articulate fully for the public the ramifications of their vague comments.
John McCain wants Fannie Mae and Freddie Mac to shrink so that their size no longer is a threat. Would he say the same thing about Bear Stearns, albeit it is far smaller? Should Bear Stearns not have been allowed to grow so large? How do we shrink such a massive entities? Remember, they hold over $5 trillion in mortgages.
Do we hold a fire sale? And would he apply the lobbying rule to other large companies? After all, they now have a heavy hand in writing the regulations that govern them. (The Medicare Part D fiasco is evidence of just how influential the pharmaceuticals were in deciding just what regulations were best for them.) Is it big government that is the problem--or big corporations that run the government?
Obama wants Fannie and Freddie out of the profit-making business. Is America ready for nationalizing such institutions? Is Obama? And could we have afforded a total collapse of Bear Stearns? Can the government simply allow such things to happen if the consequence for the nation is dire?...
As far as I can see, neither candidate is willing to tell us frankly just how dire our difficulties are--and to whom we owe money (Angry Bear; more) .
Aside: I think Obama said that they should either be one thing or the other. But as for nationalization and the question about Bear Stearns, I have no idea what his policies imply. I guess we'd all better start looking a lot harder at the policy ramifications of both party platforms.
Finally, these rough truths are offered:
We have off-shored much of our manufacturing sector in the name of efficiency and profits, ignored our energy needs, and allowed our financial institutions to rape and pillage the countryside. Some have grumbled and tightened their belts; others have smiled and fattened their wallets; yet others have just watched and written studies on entrepreneurial innovation.
Regardless of who wins the upcoming election, the next president will faced enormous problems and a lot of anger...and not much in the way of solutions.
Right now, there are no easy answers. (Angry Bear)
Like most Americans, I haven't been paying attention. Now I am. I am only just now beginning to understand the questions. I haven't yet begun to get caught up on the answers.
I am starting to realize now how everything is woven together like the eco-system. If one thread breaks, the whole thing starts unravelling. And if you yank out the broken thread, it unravels faster. Somehow you have to try to repair the thread using bits from others, without taking so much that you break those as well and without damaging the rest of the fabric.
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The dems let this get out of control - the repubs wanted to neuter it long ago. Look for John Snow's comments about 5 years ago. Mussolini actually created GSE's in Italy - how can we expect a different ending! Don't agree with the entire bailout but clearly something had to be done.
Posted by: cal-reds-only | September 08, 2008 at 03:20 PM
C-R-O, there's really no reason to think that backing F&F earlier or harder (as the Bush administration was advocating) was going to solve anything. By the time they were pushing that, the housing bubble was already bursting. The die was cast. The only question was who was going to foot the bill - stockholders, taxpayers, homeowners, or some combination of the three.
Damozel, I agree that Obama seems to be saying the right things. The devil is in the details of the bailout. Providing some individual homeowners with assistance in renagotiating their loans is one thing - shoring up the stock price of Fannie and Freddy is another entirely.
The comments from the Chinese offical are just the irrelevant grousing of someone looking for a bailout on a bad investment. Period. They thought Fannie and Freddy were a safe bet, so they put their money in. They made a decision like ANY OTHER INVESTOR. You made a bad investment? Tough. The talk of financial systems collapsing is just a lot of hot air.
In my opinion, the government should not provide a DIME of assistance to Fannie and Freddie until they have done everything they can do to clear their bad debt. In other words, they should sell off every remaining asset (i.e. every good loan) they have on the financial markets, and use the profits to buy out as much of the bad debt as they can. At that point, their stock will be useless and the government can step in to handle the rest; i.e. we can decide which individial remaining loans we want to help out on (i.e. make the taxpayers cover).
This is probably the only issue where I can read Michelle Malkin and find myself mostly in agreement with her.
Posted by: Adam | September 08, 2008 at 03:35 PM