Tag: fannie mae and freddie mac

What Caused the Crisis?

Last night National Government Radio promoted a documentary on National Government TV about the financial crisis of 2008, which concludes that the problem was … not enough government.

If the “Frontline” episode mentioned any of the ways that government created the crisis – cheap money from the central bank, tax laws that encourage debt over equity, government regulation that pressured lenders to issue mortgages to borrowers who wouldn’t be able to pay them back – NPR didn’t mention it.

For information on those causes, take a look at this paper by Lawrence H. White or get the new book Financial Fiasco by Johan Norberg, which Amity Shlaes called “a masterwork in miniature.” Available in hardcover or immediately as an e-book. Or on Kindle!

And for a warning about the dangers lurking in Fannie Mae and Freddie Mac, see this 2004 paper by Lawrence J. White.

Americans Don’t Want It

“Americans are more likely today than in the recent past to believe that government is taking on too much responsibility for solving the nation’s problems and is over-regulating business,” according to a new Gallup Poll.

New Gallup data show that 57% of Americans say the government is trying to do too many things that should be left to businesses and individuals, and 45% say there is too much government regulation of business. Both reflect the highest such readings in more than a decade.

Byron York of the Examiner notes:

The last time the number of people who believe government is doing too much hit 57 percent was in October 1994, shortly before voters threw Democrats out of power in both the House and Senate. It continued to rise after that, hitting 60 percent in December 1995, before settling down in the later Clinton and Bush years.

Also, the number of people who say there is too much government regulation of business and industry has reached its highest point since Gallup began asking the question in 1993.

That might give an ambitious administration pause. The independents who swung the elections in 2006 and 2008 clearly think things have gone too far. An administration as smart as Bill Clinton’s will take the hint and rein it in. Meanwhile, another recent poll, by the Associated Press and the National Constitution Center, shows that

Americans decidedly oppose the government’s efforts to save struggling companies by taking ownership stakes even if failure of the businesses would cost jobs and harm the economy, a new poll shows.

The Associated Press-National Constitution Center poll of views on the Constitution found little support for the idea that the government had to save AIG, the world’s largest insurer, mortgage giants Fannie Mae and Freddie Mac, and the iconic American company General Motors last year because they were too big to fail.

Just 38 percent of Americans favor government intervention - with 60 percent opposed - to keep a company in business to prevent harm to the economy. The number in favor drops to a third when jobs would be lost, without greater damage to the economy.

Similarly strong views showed up over whether the president should have more power at the expense of Congress and the courts, if doing so would help the economy. Three-fourths of Americans said no, up from two-thirds last year.

“It really does ratify how much Americans are against the federal government taking over private industry,” said Paul J. Lavrakas, a research psychologist and AP consultant who analyzed the results of the survey.

Note that 71 percent of the respondents opposed government takeovers, with 50 percent strongly opposed, before the “benefits” of such takeovers were presented.

President Obama is an eloquent spokesman for his agenda, and he has an excellent political team with a lot of outside allies to push it. But as the old advertising joke goes, you can have the best research and the best design and the best advertising for your dog food, but it won’t sell if the dogs don’t like it.

CAP’s Proposal to Add ‘Public Members’ to Corporate Boards Is Flawed

Today the Center for American Progress rolled out its proposal that we add “public directors” to the boards of companies that have been bailed out by the government.  CAP scholar Emma Coleman Jordan argues that “public directors will provide a corrective to the boards of the financial institutions that helped cause the crisis.”

One has to wonder whether Ms. Jordan has ever heard of Fannie Mae and Freddie Mac.  If she had, she might recall that a substantial number of the board members of Fannie and Freddie were so-called “public” members appointed by the President.  Perhaps she can ask CAP adjunct scholar and former Fannie Mae executive Ellen Seidman to review the history of those companies for her.

Where’s the evidence that any of those Fannie/Freddie “public” directors, whether they were appointed by Republican or Democrat Presidents, ever once look out for the public interest?  In fact all the evidence points to these public directors looking out for the interests of Fannie and Freddie, often lobbying Congress and the Administration on the behalf of these companies.

I suppose CAP would tell us that having the regulators pick the directors instead of the president would protect us from having those positions filled with political hacks.  Ms. Jordan argues that “regulators should determine most of the details of the public directorships—after all, they have the most direct experience in trying to regulate private companies that have received public funds.”  We tried that route as well.  In contrast to Fannie/Freddie, each of the twelve Federal Home Loan Banks had to have a number of its directors appointed by its then regulator, the Federal Housing Finance Board.  It was well known within the Beltway that these appointments were more often political hacks than not.  For instance one long time director of the Federal Home Loan Bank of Pittsburgh was the son of a senior member of the US House Committee on Finance Services.  Once again we’ve gone down this road, we know how this story ends.

If we are truly interested in protecting the taxpayer, we should, first, end the ability of the Federal Reserve to bailout companies, and second, as quickly as possible remove any government involvement in these companies.  Having the government appoint board directors only further entangles the government into our financial system; and if Fannie and Freddie are a good guide, actually increases the chances of future bailouts.

Housing Bailouts: Lessons Not Learned

The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.

Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:

The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

And what is the result of this surge in FHA insurance?

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

This is madness. Repeat after me: TANSTAAFL (There ain’t no such thing as a free lunch).

C/P Libertarianism, from A to Z

Fear of Freedom Leaves Only Faith Healing for Our Schools

Historian Diane Ravitch drives me nuts. She has written numerous, terrific books chronicling the ills of government control of education, including the wrenching social conflict it has caused; the ejection of meaningful content from textbooks and tests it has required; and the dominance of educrats over parents and children it has enabled. She has been, essentially, the official historian of government-schooling’s failure. And yet, in a new blog interview with journalist John Merrow, she appears not to comprehend the most important lesson her copious works have to offer: that government education is doomed to fail.

Why the huge disconnect between her historiography and willingness to act on its clear implications? Because, it appears, as much as she knows that government schooling fails, she fears educational freedom even more. “Privatization,” in her mind, is simply too dangerous:

I remember your saying in an interview years ago that you favored public schools but not the public school system that we have.  In New Orleans Paul Vallas has called for ‘a system of schools, not a school system.’  What’s your ideal approach?  Are we moving in that direction?

If “a system of schools” means that the public schools should be handed over to anyone who wants to run a school, then I think we are headed in the wrong direction. Privatization will not help us achieve our goals. We know from the recent CREDO study at Stanford that charter schools run the gamut from excellent to abysmal, and many studies have found that charters, on average, produce no better results than the regular public schools. Deregulation nearly destroyed our economy in the past decade, and we better be careful that we don’t destroy our public schools too.

Unfortunately, while Prof. Ravitch knows a gigantic amount about education history, she exhibits precious little understanding of freedom or its economic subset, free markets. For one thing, charter schooling – a system by which public schools are given a right to exist and largely held accountable by government – isn’t even close to “privatization,” if by that we mean taking control from government and giving it to free, “private” individuals. Worse, Ravitch evinces a reflexive and, frankly, simplistic fear of free markets in hyperbolically asserting that “deregulation nearly destroyed our economy in the past decade.” I’d strongly suggest that she explore some non-education history – for instance, that of government-sponsored institutions such as Fannie Mae and Freddie Mac; federal laws such as the Community Reinvestment Act; and federal regulation – before making any such over-the-top declaration again.

Ultimately, it seems likely that Prof. Ravitch fails to grasp – or, perhaps, to intuitively feel – how freedom works, and hence she fears it. Like many people, maybe she’s just not comfortable with seemingly ethereal spontaneous order, and needs to have some higher power pulling the strings to feel safe. Perhaps she fails to see how freedom, by fostering competition and innovation, produces all of the wonderful things we take for granted. Maybe she doesn’t really understand that it is due to freedom that we have an abundance of computers, coffee cups, cars, houses, package delivery services, miracle drugs, and pencils, not to mention religious pluralism, marketplaces of idea, and even happiness.

And then there’s the flip-side: government failure. While she has done more than perhaps any other historian to detail government failure and damage it has inflicted in education, Ravitch seems dead set against applying what she knows to public policy. She knows, for instance, that government often works precisely for the powerful special interests it’s supposed to keep in check. She doesn’t, though, seem to know why that is, and why it is the rule in government. She doesn’t appear to realize that the people who would be regulated, or who are employed by government, have by far the greatest motivation to get involved in the politics of their narrow areas, and hence exercise by far the most influence over them. And she doesn’t realize that it is only when special interests control government – not when they are in free markets – that they can exert unchecked power, because it is only then that they no longer have to get others to voluntarily do business with them.

Unfortunately, Ravitch’s apparent fear of freedom forces her to deny the only hope for making American education really work:  to empower all parents to choose, and to set educators free. Only then would schools be able to specialize in the needs of our hugely diverse children, and would children be able to attend them. Only then would educators have to compete for their money, forcing them to respond to the people they are supposed to serve rather than exercising political control over them. Only then would we see in education the kind of powerful innovation and progress we take for granted in everything from consumer electronics to restaurants.

And yes, freedom works in education, just as it does in almost every field of human endeavor. Despite much of the world having adopted the government-schooling model, we have ample evidence of this. For instance, James Tooley’s hugely important research reveals how private, for-profit schools are educating the world’s poorest children much more effectively than “free” government schools. And Andrew Coulson’s recent review of education research reveals that the more free an education system, the better its results.

Freedom, quite simply, works, and government, typically, does not. Which might be exactly why, after Ravitch has bashed “privatization” and “deregulation,” the only prescription she has left is blind, reality-ignoring hope: “At some point, we will have to get the kind of leadership that can figure out how to improve our public school system so that we have the education we want for our children.”

We should wait, in other words, for a miracle, a healing of that which is inherently broken. It is, of course, no solution at all, but both knowing the history of American education, and fearing real freedom, Ravitch has nothing else to offer.

Bailouts Could Hit $24 Trillion?

ABC News reports:

“The total potential federal government support could reach up to $23.7 trillion,” says Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, in a new report obtained Monday by ABC News on the government’s efforts to fix the financial system.

Yes, $23.7 trillion.

“The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn’t even imaginable,” said Rep. Darrell Issa, R-Calif., ranking member on the House Oversight and Government Reform Committee. “If you spent a million dollars a day going back to the birth of Christ, that wouldn’t even come close to just $1 trillion – $23.7 trillion is a staggering figure.”

Granted, Barofsky is not saying that the government will definitely spend that much money. He is saying that potentially, it could.

At present, the government has about 50 different programs to fight the current recession, including programs to bail out ailing banks and automakers, boost lending and beat back the housing crisis.

We used to complain that George W. Bush had increased spending by ONE TRILLION DOLLARS in seven years. Who could have even imagined new government commitments of $24 trillion in mere months? These promises could make the implosion of Fannie Mae and Freddie Mac look like a lemonade stand closing.

Administration Reform Plan Misses the Mark

The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crises. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.

Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.

Instead of addressing our destructive federal policies aimed at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However, such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.

While the Administration plan recognizes the failure of the credit rating agencies, it appears to misunderstand the source of that failure: the rating agencies’ government-created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the outsourcing of their own due diligence to the rating agencies.

The Administration’s inability to admit the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.