Free Markets, Free People

Daily Archives: January 30, 2012


Federal Housing Authority and Freddie Mac: Betting against the homeowner

This should be a big story but in all likelihood it won’t be.  But it gives you an insight to the depth of intrusion into the housing market by the federal government.  Don’t forget, the official story is that the housing problem it is all the fault of big banks.   Read this story carefully, because there is much here that should help explain why that just isn’t so:

First, the job of Freddie Mac according to this article:

Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”

And:

Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.

The dirty little secret is they were always “owned” by the taxpayer.  They were government subsidized entities (called “quasi-governmental”) whose policy was set by the federal government. 

So who is in charge of Freddie Mac?

The Federal Housing Finance Agency effectively serves as Freddie’s board of directors and is ultimately responsible for Freddie’s decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.

So let’s see, we now have a guaranteer of mortgages fully run by government (government can’t hide behind the “quasi” label anymore) and run by an essentially unaccountable bureaucrat is responsible for setting the “rules” which “determine whether homeowners can get loans and on what terms”.  Yeah, no intrusion there.

Wonderful so far, yes?

So what’s our friendly little government institution that its CEO says is “helping financially strapped families reduce their mortgage costs through refinancing” been up too lately?

Betting against the success of its “charter”.

But the trades, uncovered for the first time in an investigation by ProPublica and NPR, give Freddie a powerful incentive to do the opposite, highlighting a conflict of interest at the heart of the company. In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Note that one phrase in the second sentence before we move on: “In addition to being an instrument of government policy dedicated to making home loans more accessible …”.  That’s something that left continually denies, but, in fact, led to the type borrowing that brought the housing market down.  Both Freddie and Fannie have been “instruments of government policy” since their establishment.  Anyone who continues to deny that is simply denying reality.

Moving on, however, you see an inherent conflict of interest which all the experts are trying to waive away as something “walled off” from the side which makes the lending rules for mortgages.  No conflict they say (one has to wonder what government would say if the same conditions existed in a private concern).

But (there are lots of “buts” in this story), here’s the rub:

The trades raise questions about the FHFA’s oversight of Fannie and Freddie. But the FHFA is not just a regulator. With the two companies in government conservatorship, the FHFA now plays the role of their board of directors and shareholders, responsible for the companies’ major decisions.

Under acting director DeMarco, the FHFA has emphasized that its main goal is to limit taxpayer losses by managing the two companies’ giant investment portfolios to make profits. To cover their previous losses and ongoing operations, Fannie and Freddie already had received $169 billion from taxpayers through the third quarter of last year.

The FHFA has frustrated the administration because the agency has made preserving the value of the companies’ investment portfolios a priority over helping homeowners in expensive mortgages.

No conflict though.  The rule maker is also prioritized profit over refinancing.  Again, wondering about the private side of things, does anyone doubt that a private concern would be in the government’s crosshairs if the same things were as obvious there?

It’s a bit like state lotteries.  If you start a numbers game, you go to jail.  The state reserves only to itself the right to run numbers games.  In this case, what would have the FBI raiding the place and grabbing computers if it was a private company is simply a “debate” within the government on whether or not there’s any problem here.

Even though Freddie is a ward of the state, top executives are highly compensated. Peter Federico, who’s in charge of the company’s investment portfolio, made $2.5 million in 2010, and he had target compensation of $2.6 million for last year, when most of these leveraged investments were made.

One of Federico’s responsibilities — tied to his bonuses —  is to “support and provide liquidity and stability in the mortgage market,” according to Freddie’s annual filing with the Securities and Exchange Commission. Mortgage experts contend that the inverse floater trades don’t further that goal.

Sometimes it makes you wonder who serves whom, doesn’t it?  I look at stories like this and tend to wonder if, in fact, we’ve finally transitioned from a government of the people to one that can best be likened to the mafia.  As this story points out, the intrusion is to such a depth now that government priorities no longer reside on the side of serving the people, but instead on serving government and its bureaucracies.

Let freedom ring.

~McQ

Twitter: @McQandO


Economic Statistics for 30 Jan 12

Today’s economic statistical releases:

Personal income rose 0.5% in December, while personal spending remained unchanged. On a year over year basis, income rose 3.8 %, while spending rose 3.9%, once again exceeding the rise in income. The Core PCE Price Index, an inflation measure,rose 0.2% for the month, and is up 1.8% over last year.

The Dallas Fed Manufacturing Survey shows that manufacturing picked up the Texas Fed District last month. The general business activity index rose from -3.0 in the prior month to 15.3, and the production index rose to 5.8 from -1.3.

~
Dale Franks
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Income inequality: why you shouldn’t care

James Q Wilson makes many of the same points that have been made here over the last few months concerning the argument about income inequality that the left has been trying to use as a reason to tax the rich even more than they’re taxed now.   In sum, most of the left’s arguments rest in the premise that the economy is a zero sum game and that the income the “rich” are taking had to come from someone else’s slice.

That argument, much like the climate change debate, depends on a measure of ignorance among those they’re trying to influence. 

In reality, income inequality is nothing to be concerned about when it meets certain conditions.   Or, in other words, it isn’t a zero sum game and everyone has an opportunity to do better.

The first measure as we’ve noted before, is income mobility.  Wilson:

The “rich” in America are not a monolithic, unchanging class. A study by Thomas A. Garrett, economist at the Federal Reserve Bank of St. Louis, found that less than half of people in the top 1 percent in 1996 were still there in 2005. Such mobility is hardly surprising: A business school student, for instance, may have little money and high debts, but nine years later he or she could be earning a big Wall Street salary and bonus.

Mobility is not limited to the top-earning households. A study by economists at the Federal Reserve Bank of Minneapolis found that nearly half of the families in the lowest fifth of income earners in 2001 had moved up within six years. Over the same period, more than a third of those in the highest fifth of income-earners had moved down. Certainly, there are people such as Warren Buffett and Bill Gates who are ensconced in the top tier, but far more common are people who are rich for short periods.

In sum, you have both the top and bottom quintiles changing constantly as income earners move up or down fairly regularly.  That means those moving up must be getting the opportunity to do so somewhere, and the fact that there is a change of about half in the period studied says many are succeeding.

Who are these people that get ahead?  Well as Wilson mentions, a poor (I’m talking income here) student who graduates and gets a job in his or her field most likely won’t be poor in the sense of income very long.  And that goes for most of the “rich”:

Affluent people, compared with poor ones, tend to have greater education and spouses who work full time. The past three decades have seen significant increases in real earnings for people with advanced degrees. The Bureau of Labor Statistics found that between 1979 and 2010, hourly wages for men and women with at least a college degree rose by 33 percent and 20 percent, respectively, while they fell for all people with less than a high school diploma — by 9 percent for women and 31 percent for men.

Also, households with two earners have seen their incomes rise. This trend is driven in part by women’s increasing workforce participation, which doubled from 1950 to 2005 and which began to place women in well-paid jobs by the early 1980s.

Preparation, delayed gratification and a work ethic.  The old Puritan ideal.  Amazing the staying power it has, no?  That and adding a spouse with similar traits has a tendency to boost income to the household significantly.  Yet for some reason, the left (who, btw, are all about workplace equality and equal pay) now want you be jealous of those accomplishments.

If, as the left would prefer, we should be concerned with income inequality and the mechanism that advances it, the solution is simple:

We could reduce income inequality by trying to curtail the financial returns of education and the number of women in the workforce — but who would want to do that?

Well certainly not the left, who doesn’t want the rich to go away.  Instead it simply wants to make you hate them so they can justify taking more of their money.  But Wilson’s point is spot on.  This once was the key to the door of the American dream.  Now it’s the key to a class of citizen who is  vilified and called greedy and accused of not paying their “fair share”.  If anyone is killing the American dream, it is the American left.

The tax on the rich is offered as a panacea to all that ails us.  It will help pay down the debt and it will “level the playing” field.  One assumes that means that it will somehow help the poor not be poor. 

But Wilson points out, poverty in the US isn’t a function of the rich making a greater percentage of the national income.  Poverty is a cultural problem that has nothing to do with the rich or taxing them:

The real income problem in this country is not a question of who is rich, but rather of who is poor. Among the bottom fifth of income earners, many people, especially men, stay there their whole lives. Low education and unwed motherhood only exacerbate poverty, which is particularly acute among racial minorities. Brookings Institution economist Scott Winship has argued that two-thirds of black children in America experience a level of poverty that only 6 percent of white children will ever see, calling it a “national tragedy.”

Making the poor more economically mobile has nothing to do with taxing the rich and everything to do with finding and implementing ways to encourage parental marriage, teach the poor marketable skills and induce them to join the legitimate workforce. It is easy to suppose that raising taxes on the rich would provide more money to help the poor. But the problem facing the poor is not too little money, but too few skills and opportunities to advance themselves.

Most of the lack of economic opportunity and dearth of skills comes not from the rich making too much, but those in that condition making poor choices early in their lives.  Combine that with some of the less desirable cultural aspects of poverty and you end up with a fairly permanent underclass with little hope of advancing.

But that has nothing to do with the rich or how much they make.  Problem?  Yes.  A product of income inequality.  No.

And even then, poverty in this country is a relative thing:

Between 1970 and 2010, the net worth of American households more than doubled, as did the number of television sets and air-conditioning units per home. In his book “The Poverty of the Poverty Rate,” Nicholas Eberstadt shows that over the past 30 or so years, the percentage of low-income children in the United States who are underweight has gone down, the share of low-income households lacking complete plumbing facilities has declined, and the area of their homes adequately heated has gone up. The fraction of poor households with a telephone, a television set and a clothes dryer has risen sharply.

In other words, the country has become more prosperous, as measured not by income but by consumption: In constant dollars, consumption by people in the lowest quintile rose by more than 40 percent over the past four decades.

Income as measured by the federal government is not a reliable indicator of well-being, but consumption is. Though poverty is a problem, it has become less of one.

I always think of my mother when I read things like this.  She was defined as “poor” after retirement and my father’s death.  House paid for, cars paid for, and had more money in retirement (very large savings account) than she could spend, but when measured against the arbitrary income line, you’d have thought she was eating cat food and living in a cardboard box.   She lived very well, but her “income” – all she received a year from Social Security – put her under the poverty line. 

So Wilson’s point is correct – measuring consumption paints a completely different picture, and that picture says things are getting relatively better for the “poor” in this country even while the rich seem to be getting richer.   Something about “lifting all boats” in there.

All of this is, simply, class war populism.  President Obama said in his State of the Union address, “call it class warfare if you want.”  Okay, I will.  That’s precisely what it is.  It is the demonization of a class designed to shift blame from one entity (in this case the Obama administration) to another (the rich) and blame them for all the problems now extant. 

The fact remains that income inequality isn’t a problem.  It is certainly not even a major problem.  And for the most part, American’s reject the argument:

American views about inequality have not changed much in the past quarter-century. In their 2009 book “Class War? What Americans Really Think About Economic Inequality,” political scientists Benjamin Page and Lawrence Jacobs report that big majorities, including poor people, agree that “it is ‘still possible’ to start out poor in this country, work hard, and become rich,” and reject the view that it is the government’s job to narrow the income gap. More recently, a December Gallup poll showed that 52 percent of Americans say inequality is “an acceptable part” of the nation’s economic system, compared with 45 percent who deemed it a “problem that needs to be fixed.” Similarly, 82 percent said economic growth is “extremely important” or “very important,” compared with 46 percent saying that reducing the gap between rich and poor is extremely or very important.

So why does the left continue to pursue it?  Well, one of the reasons is, as mentioned, a need to blame someone else for the perceived failings of this administration. “It’s not our fault.  If only the rich would pay their fair share.  But the Republicans won’t allow it”.

The second, of course, is that left – champions of progressive taxation – see this as an opportunity to advance that ideal again.  Wilson asks the pregnant question which you’ll never get the left to agree too:

But what is the morally fair way to determine tax rates — other than taxing everyone at the same rate?

Indeed.  And:

The case for progressive tax rates is far from settled; just read Kip Hagopian’s  recent essay in Policy Review, which makes a powerful argument against progressive taxation because it fails to take into account aptitude and work effort.

Those are traits that can never be made “equal”.  Those are what propel some out of the lowest quintile and keep others in the highest quintile.  Since you can’t make people work harder or increase their natural aptitude for work, the only way to make things “equal” is to do what?

Penalize those who excel.

That’s precisely what the progressive tax system does.  In the case of this country, it then subsidizes those who don’t excel, thereby getting exactly what those subsides pay for – a permanent underclass, or at least the basis for one.

So, income inequality isn’t our problem.  Poverty is.  Or at least the American version of poverty.   And taxing the rich won’t do a thing to solve that problem.  Nope, the answer is much more complex and involved than that.  That’s what the left doesn’t want to face.  Because if it does, it is likely to find the root of the current problem of poverty in this country directly in programs leftists have touted for decades.

And we can’t have that, can we?

~McQ

Twitter: @McQandO

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