Free Markets, Free People
The one-sided war against Wall Street
Does Wall Street have come culpability in the financial meltdown we suffered? Of course they do. But so far, Democrats have chosen to focus only on that and ignore the culpability shared to an even larger degree by government.
Slipping through the news cycle yesterday at about 5pm eastern was this little jewel:
Freddie Mac is asking for $10.6 billion in additional federal aid after posting a big loss in the first three months of the year. It’s another sign that the taxpayer bill for stabilizing the housing market will keep mounting.
The McLean, Va.-based mortgage finance company has been effectively owned by the government after nearly collapsing in September 2008. The new request will bring the total tab for rescuing Freddie Mac to $61.3 billion.
The fact that Freddie Mac and his ailing sister Fanny Mae have been hemorrhaging money since September 2008 with no end it sight didn’t stop them from paying retention bonuses to their officers even while private payments such as that were vilified and demonized.
Another bit of fiction that Democrats in Congress like to use is that both are “quasi-governmental” entities, or, in fact, really private institutions. In fact they’re not at all:
As the CBO notes in a recent background paper, the standards for when to include government-sponsored entities in the budget go back to the 1960s, when a Presidential commission laid out a set of questions.
To wit: “Who owns the agency?” (In the case of Fan and Fred, taxpayers.) “Who supplies its capital?” (Taxpayers.) “Who selects its managers?” (The federal government.) And finally, “Do the Congress and the President have control over the agency’s program and budget, or are the agency’s policies the responsibility of the Congress or the President only in some broad ultimate sense?” (The feds have control in every sense.)
All that happened in September of 2008 is Hank Paulson put them in conservatorship. In fact, Freddie and Fannie alone will account for up to $391 billion in bailouts over 10 years according to the CBO. So why are the Democrats pointedly ignoring these two institutions? Reread the CBO background paper, especially the part about who selects the managers and who has control over the agency’s program and budget, not to mention control over it’s policies.
Ezra Klein tries to wave it all away as he delicately attempts to explain how Freddie and Fanny are really beneficial to society as a whole and not financial black holes. But now matter who hard he tries, he can’t quite avoid the truth:
The mortgage giants, slightly confusingly, do not sell mortgages. They buy them from the banks that sell them. About 90 percent of them, to be precise. They do that to make mortgages — and thus home ownership — cheaper. That’s fine. If the country wants to encourage home ownership as a policy, subsidizing banks so they can offer better mortgage terms is a sensible way to do it.
I assume he typed that with a straight face. Uh, no Ezra, that’s not the way to do it. That “policy” (Community Reinvestment Act) which was hardly endorsed by the “country” is precisely what incentivized sub-prime mortgages (you sell ‘em, we’ll buy ‘em no matter how bad they are) and the eventual collapse. So that makes it anything but “sensible”.
Klein then attempts to further the myth of “quasi-governmental” status for the two institutions and, in a rather amusing and round about way, admits they were the cause of the whole thing:
Rather than using taxpayer dollars to subsidize mortgages, they were borrowing money very cheaply because their quasi-governmental status assured the market that there’d be a taxpayer bailout in the case of any sort of collapse. That is to say, their business model relied on markets ignoring the risk of their activities. And then, because they were private companies with shareholders to please, they also got into slicing and dicing mortgage packages to make money like an investment bank rather than a housing policy. In theory this should’ve worried the markets where they borrowed their money, but again, the government backstop saved them. Forget too-big-to-fail. This was not-allowed-to-fail.
Their “business model” relied on markets ignoring the risk of their activities? No. Instead their policy (CRA) directed that Fannie and Freddie ignore the risk an buy these mortgages that were a bad deal. In effect, by direction of a policy that encouraged and incentivized it, mortgage companies complied with the CRA and Freddie and Fannie bought the bad paper.
Klein denies this had anything much at all to do with the collapse of the mortgage market – even with $391 billion in bailouts staring him in the face. The most he’ll admit too is they were “part of the problem.” And that is at least better than the Democrats will do.
But he ends up doubling back on himself without seemingly knowing it:
Of course, you don’t necessarily need to eliminate Fannie and Freddie. You could solve the problem by fully incorporating them into the government and making them a straightforward housing subsidy rather than a stealth housing subsidy hidden within a profit-maximizing company. But it’s not clear that bringing more major institutions under the control of the government is going to be popular, either. So what do you do?
Well, it’s hard to say. Procedurally, Democrats think that the Fannie and Freddie question is a housing market question and should be dealt with in the context of a major housing-policy bill. What that bill will do, however, is anyone’s guess. And that’s pretty much where we are on Fannie and Freddie.
As pointed out, they both are “fully incorporated” into government whether that’s technically true or not. They’re certainly not private, and they’ve never really been “quasi-governmental”. They’ve been organs that execute government policy, no matter how absurd or costly. And recommending the two institutions be handled in the context of a “major housing-policy bill”, further cements the point that they’re part of the government that executes policy as it pertains to the housing industry.
And by the way – the payments to these two institutions are being kept “off the books” – meaning they don’t have to be accounted for in budgeting.
Until and unless these two institutions are addressed within any “comprehensive” financial reform bill, the bill isn’t worth the powder to blow it to hell. And when Sen. Chris Dodd (D-CT) announces, “we’ve ended the ‘too big to fail’ debate. So no longer do I expect any argument to be made that this bill exposes the American taxpayer” feel fully entitled to shout that which fans normally shout at officials at sporting events who get the call wrong.