Pay attention. We are witnessing the inflation of the largest and potentially most devastating economic bubble of our lifetimes. It’s the bailout bubble, and when that bubble pops it could kill the most successful economic system in the world.
First, the federal government decided to bail out fraudulent homebuyers who lied about their incomes to take out home mortgages they couldn’t possibly afford. Then, the federal government bailed out gullible and/or deceitful lenders and Wall Street investors facing gigantic losses because they failed to assess the risks tied to mortgage-backed and asset-backed securities.
Next, it was time to bail out manufacturers of shoddy products that are inefficiently produced. Now, we are told the entire economy needs to be bailed out. On the eve of President-elect Barack Obama’s inauguration, the country appears solidly behind undefined plans to increase federal government spending by hundreds of billions of dollars, perhaps a trillion dollars or more.
In a bailout bubble, no spending request is too small. No amount of inefficiency and waste is ridiculous. “It’s much better to do too much rather than too little. You can always scale back.” Forget about the failures of Great Society “antipoverty” programs such as Aid to Families with Dependent Children, Medicaid and food stamps. Worry later about unsolved social problems like teenage pregnancy and drug abuse. Don’t be bothered when failed government programs worsen such devastating social problems.
We need public works projects to rebuild crumbling infrastructure while creating millions of make-work jobs. Bush administration bailouts failed because they were too small. Bailout failures can only be solved by even bigger and more flamboyant bailouts.
The way to solve problems created by “liar loans” is to reward fraudulent borrowers. If fraudulent homebuyers lie about their incomes to take out mortgages they can’t possibly afford, forgive a large chunk of their indebtedness and refinance with low-interest mortgages backed by the federal government. The way to punish deceitful lenders and gullible Wall Street investors is to cover their losses. The way to cure problems created by enormous and growing leverage among consumers, corporations, and all levels of government is to increase borrowing.
Companies must be rewarded when they are inefficient and produce shoddy products. Prevent misallocated resources from being liquidated and made available to efficient companies that produce products that customers are eager to buy.
Unlike a healthy free market where success is rewarded and failure is punished, we must reverse the process. Take resources away from successful corporations (like Toyota) and give them to failing companies (like GM). In a successful election campaign, politicians like Barack Obama railed against “corporate welfare.” In a buyout bubble there is no corporate welfare. There are only necessary corporate incentives to save the economy. Like other famous economic bubbles, buyout bubbles involve:
1. Irrational behavior. How long will it take Washington to admit that you cannot fix a housing bubble by rewarding bad conduct among borrowers and lenders? Sensible and generally rational people sometimes make foolish and irrational economic decisions. In 1634–1636 at the height of the “tulip mania” in Holland the market price for a single tulip bulb approached $35,000 in present-day dollars. When the bubble burst, tulip prices quickly plunged to less than the present-day equivalent of $1 each. It has long been safe to characterize a $35,000 tulip price as “crazy”; only recently have tech stock investors admitted it was crazy to place billion-dollar valuations on Internet stocks with no revenues.
2. Unfamiliarity with basic economic facts. The economic history of the United States is one of long, steady progress punctuated by short economic recessions. Recessions invigorate the economy by reallocating resources to new and better uses. Between October 1919 and November 2001, there were 17 complete business cycles. The economic expansion that started in November 2001 ended in December 2007. Since 1945, the average duration of each cyclical contraction has been 10 months. The average duration of each cyclical expansion has been 67 months (or five and one-half years).
3. New and untested decision-makers. Most working adults have never experienced a serious economic recession. Like many in Washington, President Obama has no first-hand adult experience with how the economy bounces back from recessions. The last serious U.S. recession lasted 16 month from July 1981 to November 1982 when the unemployment rate hit 10.8 percent. The December 2008 U.S. unemployment rate reached 7.2 percent in the current recession that is now 13 months old.
In 1982, Barack Obama had just transferred from Occidental College in California to Columbia University in New York where he majored in political science. It would be another 22 years before he was elected to the U.S. Senate and another 26 years before he was elected president.
The failed economic policies of the Bush administration have greatly contributed to the economic problems the nation now confronts. Confidence in basic free-market principles has been shattered. We elected Obama as a fresh new face proposing change in which we can all believe. Let’s hope he starts by abandoning the failed Bush administration idea that corporate welfare and government bailouts inspire sound economic decisions. Let’s deflate the bailout bubble before it pops and threatens our free and open society.
Comments
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igby (anonymous) says…
I would agree with everything accept the last paragraph. All our problems are basically symptoms of a big hole in our pocket that can't be fixed unless we as Americans decide one day that America will not survive in the globalization-world economy concept without being reduced to rubble. For the last 30 years or more the push for global economies of scale by the very professors who point their finger at just one president and blame him for the whole sham of economy-bungling that continues to make the leftist (Russians) criminals rich and at the same time spread leftist principals like (drugs, weapons, poverty) to these very countries that American businesses are moving into which your dollar lubricates the wheels of their plot to destroy free trade by re-directing liquidity into these black markets. There is no way to stop these countries from fueling this plan unless we as Americans each decide to stop buying their products-totally. Bankrupt them now, start today.Re-gain your economy or you will lose everything even your freedom to walk as a free person.Why should we continue to fuel dollars into countries in which their are no good leaders or real loyal supporters of freedom. They turn their backs on freedom and go into bondage, blindly forgetting and cutting off the good-hand that feeds to knaw at the bitter hand that slaps their face with dictatorship and poverty.
Liberty_One (anonymous) says…
Depressing, but true.
igby (anonymous) says…
May I point out that every great civilization in History has failed from Atlantians to the Romans to the British Empire and also the USSR; when it tried to bring all the many cultures into it's empire, economically supported. It will never work unless the Principal totally controls all aspects of the government. The spoilers will come every time. Just like in the real estate loan crisis we are now suffering from. Good jobs have been leaving the country for cheaper labor overseas for the past 12 years. Everyone's been living on credit from the home equity values increasing due to inflated tax values by local governments that where tipped by the Dems push for local control of government too raise tax revenue for social programs. The greedy real estate and loan markets did their function for profit as well and here we are.It you think for one minute that a Dem controlled House, Senate and Oval Office can and will lead us out of this economy sweltering hole your sadly wrong and you should file bankruptcy along with all your dead-beat political cronies.
bondmen (anonymous) says…
In large part very well said and I agree Bush and Greenspan were fiscal and economic disasters (both abandoned their once held free market principles) but your hopes in Obama and the CONgress making the correct policy decisions to get the economy back on track will be quickly dashed on the jagged rocks of reality. Sadly big government brought this catastrophe about and big government thinks getting bigger will solve it. Who here believes a broken dam can be patched with more water?"To quote a recent op-ed in the Journal, which likened the government response to the current financial crisis to the circumstances described in Ayn Rand's Atlas Shrugged..."Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs . . . and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism."The similarities are so striking, it almost seems like regulators are using Atlas Shrugged as a playbook for their policy response to the crisis. They must not have waded through all 1,000 pages to see how the story ended."
pomegranate (anonymous) says…
The "Pizza Street" restaurant in the 6th St Hy-Vee shopping center bit the dust.
Godot (anonymous) says…
Obama is keeping the Bush economic team almost intact. Geithner, the nominee for Treasury Secretary, is NY Federal Reserve Chairman. The New York Federal Reserve is the most powerful of the Fed Banks, and was in charge of the bailouts for Wallstreet. He is a Paulson croney and clone. Helicopter Ben Bernanke is staying on as Chairman of the Federal Reserve. He is the one who thinks the way to solve a problem caused by excess indebtedness is go far, far, far deeper into debt. Bernanke, Geithner and Paulson, with the assistance of the Democrats in Congress, President Bush and President-elect Obama and his team, have perpetrated the greatest fraud and theft, the hijacking of the US Treasury, in the history of the world. It appears to me that they have set the stage for the Obama administration to nationalize the US banking system by coming to the rescue of bad banks by forcing good banks to sell preferred stock and warrants in their corporations to the Treasury to provide "cover" for the bad banks.Here is the list of who benefitted, or were forced to participate, in the TARP during 2008. http://www.ceoreportcards.com/january... are the financial institutions (not all banks) in which you, as a taxpayer, currently have a substantial ownership interest and, I predict, which in the very near future, will own 100%. The SOBB's (shills for big banks) on Obama's economic team have conspired to shield the investors in the Big Banks by not telling us what they really know about their condition. They will not tell us which on the list are the bad banks and which are the healthy ones that were sacrificed to give life support to the frauds and crooks.
merrill (anonymous) says…
Where should the cutting begin:?The Military Cost of Securing EnergyAccording to a new report from National Priorities Project (NPP), the United States is spending between $97 and $215 billion dollars annually on military action to defend access to oil and natural gas reserves around the globe. The Military Cost of Securing Energy provides a critical analysis of the military cost of defending U.S. energy concerns overseas. The report estimates that the military spends up to 30 percent of its annual budget to secure access to energy resources internationally.===========================================Yes the USA can afford to leave Social Security alone:What impact would any plan have on the national debt?Unless taxes are raised, the government will have to borrow up to $4 trillion over the next 20 years to make up the money that is drained out of the system by private accounts. Social Security privatization will raise the size of the government's deficit to nearly $700 billion per year for the next 20 years, almost tripling the size of the national debt.How will the rest of the U.S. economy be affected if the president's plan is enacted?Put simply, moving to a system of private accounts would not only put retirement income at risk--it would likely put the entire economy at risk.http://www.dollarsandsense.org/archives/2005/0505orr.html
Godot (anonymous) says…
Here is another great analysis by a retired Finance professor, Michaeal S Rozoff, titled: How to Steal Billions in Plain View: Bernanke's Robber Banks:"The Federal Reserve is living up to its purpose, which is to enrich bankers at the expense of everyone else. Ben Bernanke, who chairs the Federal Reserve Board, is to be congratulated for his open call for the banks under his tutelage to receive billions more of our tribute.Let us understand the matter clearly. We have exited a significant boom period. During the boom, the bankers made large and very large profits. The managements took home very large pay and bonuses. The stockholders (including officers and managers of the banks) had, for a time, very large wealth in the stocks they held. The bondholders of the banks had, for a time, very secure debts.But the bankers over-reached for business in several ways. They extended a slew of bad loans during the lately departed boom. The stocks and bonds fell in price, reflecting the lower worth of the bank assets, these bad loans.And now that the boom is over, the bankers, led by Mr. Bernanke, want us to eat their losses.Bernanke urges Congress to absorb the bad loans. The details of his three alternative plans are secondary to the fact that they all ask that others pay for the losses that the bankers caused, or else they involve the government in a variety of complicated maneuvers by which the government ends up shoring up these banks and bankers while taking on various risks of owning portfolios of bad loans. The idea is for the bankers to offload their mistakes onto taxpayers........."continued below....
Godot (anonymous) says…
Rozeff, cont:"One plan has the government buy the bad loans. Why? Why don’t the bankers reveal what these loans are and sell them in the market? Such sales will reveal that their assets are worth even less than what the market now thinks. The insolvency of the banks will not only be revealed but it will trigger legal ramifications. The banks will have to be re-organized. This will mean breaking them up. It will mean that the holders of the securities of the banks will face large losses, even larger than are now being reflected in the current market prices.A government bailout does the following. It preserves the bank organization. It preserves the current bank management. It transfers taxpayer wealth to the security holders of the bank (bondholders, preferred stockholders, and stockholders). It transfers wealth to counterparties to other contracts that the bankers entered into. Why is any of this necessary? What is so precious about these banks? Haven’t they demonstrated a level of high incompetence? Shouldn’t that spell their doom?Heads I win, tails I win. That is the deal that Bernanke wants for the banks and these associated parties. Tails – they should be losing. No one else should be footing the bills."Cont below
Godot (anonymous) says…
Rozeff, cont."Citibank or Citigroup is emblematic of the whole tawdry affair. Why in the world should we be saving Citibank? I have been wondering about this for some time before Bernanke’s latest salvo. The government already made a complex deal involving over $300 billion of this company’s loans. What is so special about this bank, other than it has attempted to become a world-girdling enterprise and is failing badly in this endeavor? It even has an office two miles from where I write that usually looks barren. Why should we support the ambitions of a bank like this that is competing with a myriad of other banks in this area alone? The reasons given by Bernanke are absurd ("to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,..."). Promoting overcapacity and singling out inefficient banks for the grace of taxpayer dollars does not promote a lasting recovery and it surely does not strengthen the financial system. Shifting the assets of Citibank, such as they are, to higher-valued uses through re-organization is a sound way to promote recovery and strengthen the economy. But this path would require that a lot of Bernanke’s favorites would bear losses. It would mean a rather different banking system might emerge that influential members of the Fed, who apparently shape its recommendations and bailouts, do not want. What cheek! What effrontery! What brazen thievery! How disgusting!The losses of the banks are already to a large extent reflected in the lower security prices of the stocks and bonds of the banks. However, investors do not yet know fully what these losses are because the bankers have not yet recognized and reported on them fully in their accounting or in any other way. If the government were not available as a possible trash bin, the banks would be forced into re-organization, and that is as it should be." Cont....
merrill (anonymous) says…
Locally where do we start:Elect new thinking commissioners to stop the "stay the course" mentality that has not produced long term economic growth. This is what "stay the course" mentality brings us akaconstant increases to our cost of living:http://www.sierraclub.org/sprawl/report00/corporate.asphttp://www2.ljworld.com/polls/2007/sep/why_do_you_think_lawrence_growth_lagging/http://www2.ljworld.com/polls/2007/jun/what_do_you_think_mayor_sue_hacks_sales_tax_propos/Who consistently funds the campaigns of "stay the course thinkers?:Voters it's time for weeding out what appears to be Lawrence,Kansas corruption which produces conflict of interest commissioners. Taxpayers cannot afford conflict of interest commissioners.Meet the “Emergency Party” :How about this “Unique Investment Opportunity” memofrom Ron Durflinger. He is a former planning commissioner and home builder. Anyway it does appear he and Doug Compton like to party. No doubt the mover and shakers from the real estate industry did attend.Subject: Unique Investment OpportunityFrom: Ron DurflingerInvest in the Future of LawrenceSupport Lawrence City Commission candidatesMichael Dever and Rob ChestnutPlease attend an emergency party to raise funds for Rob and Mike.When: Monday, February 12, 2007 7:00-8:30 PMWhere: First Management Gymnasium, 601 N. Iowa Street, Lawrence, KS.Use the link below for directions if needed.http://www.mapquest.com/maps/map.adp?for…Bring your checkbook; Bring your friends; Bring your friend's checkbook!There will be beer and soft drinks to cry in.We can't change everything, but we CAN change the faces of the Lawrence City commission“There are Republicans. There are Democrats. And then there are Emergencies!”Ron Durflinger, Chairman of the Emergency Party
Godot (anonymous) says…
Here is the last snippet from Rozeff:"I wish the whole dreary episode were over, but instead each day I am punished by more dreadful trial balloons and suggestions such as the latest emanating from Bernanke. There seems no end to the extent of it. Obama, the candidate of hope, comes across to me as a clueless patsy in this affair. If he understands any economics at all, he surely does not show it, not yet. According to the Wall Street Journal, he wants the second half of the $700 billion so that he won’t be caught without emergency funds if financial markets weaken further.....*(edit: he got it).....The model being used by Obama and his advisers is that one shoots dollars at bear markets and failing firms, which is what the weaker financial system really means, and that these dollars cure the losses in value. (These dollars are of course printed up.) The idea is that one cures lower asset prices by injecting dollars into the system somehow. This inane idea parallels the equally inane idea of FDR and his advisers when he took office in 1932 that the cure was to raise the prices of goods and services.......The decisions as to what is productive or not cannot be lodged in the hands of marshals in Washington loaded with six-guns ready to shoot billion dollar bullets every which way. They have no idea what the capital pricing should be or where capital should be shifted or what enterprises should receive new capital. They are politicians, economists, lobbyists, and lawyers. And, by the way, the title of economist does not by any means suggest that a person knows anything about the ins and outs of business or what businesses should receive capital or not. Academic economists often talk and act as if they know it all, but there is no evidence that they do. There is no evidence that any person or even group of persons is able to understand and direct an entire economy. Even in individual markets, the entrepreneurs closest to the action make frequent mistakes. Directing a "financial system" to a condition of stability and progress with $350 billion is a task beyond the scope of Mr. Obama and Mr. Summers or all the king’s horses and men. They can only throw sand into the gears. They need only look at the actions of their predecessors and the directives of past administrations who brought Fannie Mae and Freddie Mac into being, who encouraged subprime lending, who allowed insurance companies to endanger policyholders by writing credit insurance, and who recently have fallen into a $150 billion black hole with AIG. Closer to home, they might look at the long list of government actions in the past 15 months that have, more often than not, ultimately been associated with lower prices of stocks and corporate bonds...............The Fed’s attempts to bail out its clients are worse than futile. They are blatant theft."
bizarre (anonymous) says…
Pizza street bit the dust?????You mean no more little Pizza guy standing on the corner with his sign waving at me when I drive by?????????????
jayhawklawrence (anonymous) says…
Sometimes you have to learn the hard way, by trial and error. It is a good time to correct problems in the system that would never have been corrected without a systemic failure. The fact of the matter is that Americans are very resilient and they will bounce back stronger than anyone ever thought possible. We will surprise ourselves. It is not in our nature to be losers. And we will be a better country for it. My hope is that we generate more opportunities for new small businesses and create jobs in new markets such as the alternative energy market. It is very promising. The practice of allowing unfettered lobbying by special interests is counter to our American values. The little guy, the average American is being left out and hurt by rising costs of living and lower wages and benefits. While at the same time the head of Lehman Brothers pays himself $450 million over 10 years. The concept that there is an elite class that deserves outrageous compensation is a disease in our country and a disgrace. There has to be more respect for workers instead of the name calling we often hear.
srj (anonymous) says…
Um, it was the democrats that voted for the Bush bailouts, and I don't see that changing under Obama. The one good thing we can take from this is consumer debt is going down, and maybe we will learn about debt management better. The consumers have the power, and we found that out when gas hit $3-$4 bucks, we used less, and the oil companies are paying the price for it now.
Godot (anonymous) says…
srj, I agree. We should stop using government and banks to get them under control.
Sigmund (anonymous) says…
Finally, a article by a KU Professor that doesn't completely suck. Professor Mark Hirschey's article misses the mark only in that fails to mention how the banks were able to sell all that sub prime paper to investors. It was given the kiss of legitimacy by Freddie and Fannie. In fact, it was US government policy for the banks to make affordable loans to those who otherwise would not have qualified which created all the froth, aka sub prime junk mortgages.All that cheap money drove existing house prices and new home construction through the roof, so to speak. Feeling rich homeowners tapped that newly created equity to buy stocks, bonds, LCD TV, and cars as the froth bubbled over into the whole economy, everyone benefited not just CEO's of financial institutions. Unless or until the Federal Government realizes the role they played as the catalyst for the current crisis and cleans their own house the economic crisis will continue to worsen. As this economy begins to crash into the icy cold waters of the Hudson, President elect Obama's pick of Timothy Geitner as the pilot in command at Treasury the head of the New York Fed and co-architect of the original Bush/Paulson/Pelosi/Obama bailout flight plan (who repeatedly failed to pay his own Social Security and Medicare taxes for four years despite repeated reminders from the IRS and his employer) is not change that anyone should believe in. Heads Down! Brace For Impact!Still, great article by Prof. Hirschey. Assuming this wasn't some fluke I look forward to more commentary and analysis from what must be the only rational member of the KU faculty willing to write and able to be published by the LJW.
Sigmund (anonymous) says…
As an interesting aside and not that Mark would remember, I was a student of Professor Hirschey at KU. We disagreed over my writing style which was obviously both brilliant and epic even back then! Anyway when he asked me to rewrite an assignment I withdrew from his class over his objection. I regretted my decision almost immediately and often wish that I had completed his class.
just_another_bozo_on_this_bus (anonymous) says…
"Professor Mark Hirschey's article misses the mark only in that fails to mention how the banks were able to sell all that sub prime paper to investors. It was given the kiss of legitimacy by Freddie and Fannie. In fact, it was US government policy for the banks to make affordable loans to those who otherwise would not have qualified which created all the froth, aka sub prime junk mortgages."Perhaps, Sigmund, he didn't mention it because it's not supported by the facts.http://www.mcclatchydc.com/251/story/53802.html"As the economy worsens and Election Day approaches, a conservative campaign that blames the global financial crisis on a government push to make housing more affordable to lower-class Americans has taken off on talk radio and e-mail.Commentators say that's what triggered the stock market meltdown and the freeze on credit. They've specifically targeted the mortgage finance giants Fannie Mae and Freddie Mac, which the federal government seized on Sept. 6, contending that lending to poor and minority Americans caused Fannie's and Freddie's financial problems.Federal housing data reveal that the charges aren't true, and that the private sector, not the government or government-backed companies, was behind the soaring subprime lending at the core of the crisis.Subprime lending offered high-cost loans to the weakest borrowers during the housing boom that lasted from 2001 to 2007. Subprime lending was at its height from 2004 to 2006.Federal Reserve Board data show that:More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year.Only one of the top 25 subprime lenders in 2006 was directly subject to the housing law that's being lambasted by conservative critics."
just_another_bozo_on_this_bus (anonymous) says…
A bit more--http://www.mcclatchydc.com/251/story/53802.html"Conservative critics also blame the subprime lending mess on the Community Reinvestment Act, a 31-year-old law aimed at freeing credit for underserved neighborhoods.Congress created the CRA in 1977 to reverse years of redlining and other restrictive banking practices that locked the poor, and especially minorities, out of homeownership and the tax breaks and wealth creation it affords. The CRA requires federally regulated and insured financial institutions to show that they're lending and investing in their communities.Conservative columnist Charles Krauthammer wrote recently that while the goal of the CRA was admirable, "it led to tremendous pressure on Fannie Mae and Freddie Mac — who in turn pressured banks and other lenders — to extend mortgages to people who were borrowing over their heads. That's called subprime lending. It lies at the root of our current calamity."Fannie and Freddie, however, didn't pressure lenders to sell them more loans; they struggled to keep pace with their private sector competitors. In fact, their regulator, the Office of Federal Housing Enterprise Oversight, imposed new restrictions in 2006 that led to Fannie and Freddie losing even more market share in the booming subprime market.What's more, only commercial banks and thrifts must follow CRA rules. The investment banks don't, nor did the now-bankrupt non-bank lenders such as New Century Financial Corp. and Ameriquest that underwrote most of the subprime loans.These private non-bank lenders enjoyed a regulatory gap, allowing them to be regulated by 50 different state banking supervisors instead of the federal government. And mortgage brokers, who also weren't subject to federal regulation or the CRA, originated most of the subprime loans.In a speech last March, Janet Yellen, the president of the Federal Reserve Bank of San Francisco, debunked the notion that the push for affordable housing created today's problems."Most of the loans made by depository institutions examined under the CRA have not been higher-priced loans," she said. "The CRA has increased the volume of responsible lending to low- and moderate-income households."In a book on the sub-prime lending collapse published in June 2007, the late Federal Reserve Governor Ed Gramlich wrote that only one-third of all CRA loans had interest rates high enough to be considered sub-prime and that to the pleasant surprise of commercial banks there were low default rates. Banks that participated in CRA lending had found, he wrote, "that this new lending is good business.""
camper (anonymous) says…
Great editorial here. It has caused me to pondering a couple of things:1) Though economic cycles are inevitable, would they be less if business was content with steady growth rather than always looking for the big short-term gain and Vegas style stock appreciation.2) What is so bad about turning a profit....even if the business is not growing. These profits can go into retained earnings or distributed to long-term investors as dividends.3) Why are we seeing deflation when the Federal Reserve is printing money at a record pace.4) If we do go into a depression, what challenges will present themselves as we are largely a service sector economy.....we have virtually no mfg base compared to 1929.
Sigmund (anonymous) says…
The article by Kevin G. Hall, McClatchy's economics reporter is horribly misleading, for instance."Federal Reserve Board data show that:* More than 84 percent of the subprime mortgages in 2006 were issued by private lending institutions.* Private firms made nearly 83 percent of the subprime loans to low- and moderate-income borrowers that year."This implies that Fannie and Freddie made the remaining loans, but surprise Fannie and Freddie do NOT make any loans! None, nada, zilch. What does Freddie and Fannie do? They take home loans, repackage them, give them the kiss of government guarantee, and then sells them to investors sometimes including the banks (both good and bad lenders) that issued the loans. This is known as "securitization." Without that blessing all those loans could never have been resold. How many? While not wholly responsible Fannie and Freddie is responsible for 50% of the total mortgage markets, by definition the largest single player."Fannie Mae and Freddie Mac are so big — they own or guarantee roughly half of the nation’s $12 trillion mortgage market — that the thought that they might falter once seemed unimaginable."http://www.nytimes.com/2008/07/11/business/11ripple.html?ex=1373515200&en=8ad220403fcfdf6e&ei=5124&partner=permalink&exprod=permalinkWhile I could go on, I won't. Except to note that Kevin G. Hall, McClatchy's economics reporter is (NOT an economist), has gotten even the basics facts of Fannie and Freddie wrong. Apparently he once wrote that, "The companies (Freddie and Fannie), however, aren't taxpayer funded but operate as private companies. The takeover may result in a taxpayer bailout during reorganization."http://www.mcclatchydc.com/227/story/51940.htmlWhen you get such obvious basic facts wrong it isn't surprising his reporting and analysis is so useless.
just_another_bozo_on_this_bus (anonymous) says…
His facts were not wrong. While the many policies governing Fannie and Freddie can be faulted, the fact remains that the vast majority of subprime loans were originated by the private sector by institutions with few restrictions on them, and whose goal was to make as many loans as possible, regardless of whether they followed sound practices, and sell them off as soon as possible. They were motivated strictly by the prospect of a quick buck, regardless of the potential negative consequences, because they intended to pass them off on someone else as quickly as possible. They were not making these loans because the government tried to encourage lending to low-income borrowers.
Sigmund (anonymous) says…
just_another_bozo_on_this_bus (Anonymous) says… "His facts were not wrong. While the many policies governing Fannie and Freddie can be faulted, the fact remains that the vast majority of subprime loans were originated by the private sector by institutions with few restrictions on them, and whose goal was to make as many loans as possible, regardless of whether they followed sound practices, and sell them off as soon as possible."No not the vast majority, ALL of the loans were originated by private institutions as Freddie and Fannie are not lenders. The fact remains that if Freddie and Fannie hadn't securitized those loans AFTER they were originated by private institutions they could never have been sold into the secondary market and subprime lending would have slowed or even stopped. It was primarily the Fannie and Freddie guarantee that allowed all those loans including subprime to be sold to the gullible as "safe government" investments.
just_another_bozo_on_this_bus (anonymous) says…
So you would agree that the problem arises from insufficient oversight and regulation?
Liberty_One (anonymous) says…
just_another_bozo_on_this_bus (Anonymous) says… "They were motivated strictly by the prospect of a quick buck, regardless of the potential negative consequences, because they intended to pass them off on someone else as quickly as possible. They were not making these loans because the government tried to encourage lending to low-income borrowers."No blame at all for the Federal Reserve's artificially low interest rates that created loose, easy credit which gave these lenders the opportunity to try and score a quick buck? No blame for the government manipulation of market conditions that made these types of lending practices attractive? No blame for the tax subsidies that encourage people to buy homes and punish those that don't, artificially driving up demand for homes? No blame for the government pumping money into the housing market, artificially driving up home prices? No, says bozo, it's all evil businessmen who where trying to make money, heaven forbid.
Sigmund (anonymous) says…
just_another_bozo_on_this_bus (Anonymous) says… "So you would agree that the problem arises from insufficient oversight and regulation?"Depends upon the specifics of the regulation. In fact the Bush Administration pushed for increased regulation and tightening of standards for Freddie and Fannie for years which was resisted eventually rejected by both Democrats and Republicans in Congress year after year. Here is a sample video from 2004 and although it focuses on Democrat resistance I assure you there are examples of Republicans as well.http://www.youtube.com/watch?v=_MGT_cSi7RsIf you want to put Freddie and Fannie under the same strict regulations as Banks, they are currently exempted, I'd be all for that.
Sigmund (anonymous) says…
As an exercise for the reader, why is Ginnie Mae solvent and not Fannie Mae and Freddie Mac? A clue can be gleaned from their homepage, "The only mortgage-backed security that enjoys the full faith and credit of the United States Government."http://www.ginniemae.gov/index.asp
Liberty_One (anonymous) says…
Max1, it was government money that they were using, that wouldn't have been there had it not been for the cheap credit they were offering. You can call the businessmen who were involved "free-market" all you want, but there's no question that free market conditions had no part to play in this bubble. It was aritficial conditions that lead to malinvestment of the market, had free-market conditions existed, the money would not have been available. Capitalism is based on *capital*, not government credit, and once capital dries up, lenders become more picky about who they lend to, not less.
Liberty_One (anonymous) says…
max1 (Anonymous) says… "The value (purchase power) of the dollar (capitol) is tied to the public's faith in its currency, and who controls that currency?"The value of the dollar is determined by supply and demand.
Liberty_One (anonymous) says…
max1 (Anonymous) says… "Congress loves the Fed because it allows them to spend all they want without restraints, except, of course, for that mangy national debt piling up in the background that our kids will have to eat for Christmas."It also causes these boom and bust cycles.
Sigmund (anonymous) says…
max1 (Anonymous) says… "First, the federal government decided to bail out fraudulent homebuyers who lied about their incomes to take out home mortgages they couldn’t possibly afford. First things first: Just as with oil, it was “free-market” investors and speculators who pushed the price of housing up."First things first, where did the money come from? Banks don't lend money they don't have, so where did the money come from to make all the loans to drive up the home prices? Answering my own question, the originators of the loans sold them (about 50% of them) to Fannie and Freddie who blessed them with US government goodness and sold them to back to banks, pension funds, and individual investors worldwide who had risk capital. That is why all those investors trusted, without verifying, the underlying mortgages. Without Freddie and Fannie in the market it is unlikely that the mortgage bubble would have been as big no lasted as long. The oil bubble lasted all of what, 4 months? Why didn't that go on for years? Again answering my own question, the money dried up. Investors were unwilling to chase oil past $140/barrel. What would happened if the there was a government agency whose purpose was to make cheap money available to risky oil speculators so they could buy oil futures contracts? The bubble would gone much higher and lasted much longer.
Sigmund (anonymous) says…
Second things second, when the subprime mortgages began to default, the banks and insurance companies (remember AIG) that held the Fannie and Freddie blessed paper and looked to those GSE's to make good on their promise to make those loans good. When Fannie and Freddie couldn't come up with the money the banks and insurance companies were under capitalized. Even though Freddie and Fannie paper didn't carry the "full faith and credit of the US government" (unlike Ginnie Mae) the government felt a "moral obligation" to bail them out.
Sigmund (anonymous) says…
Finally to answer the question of why Ginnie Mae is solvent and not Fannie Mae and Freddie Mac are not. Remember, Ginnie Mae is in the same basic business as Freddie and Fannie but they are "The only mortgage-backed security that enjoys the full faith and credit of the United States Government.” Because the US backs those securities directly the the US required stricter underwriting of those loans, much stricter than Freddie and Fannie. Very few subprime loans because very few subprime borrowers with no down payment liar loans. I know, it is shockingly obvious.