Tag: financial crisis

Obama Proposes Further Delay on Fannie & Freddie

President Obama seems to be slowly waking up to the fact that the American public has grown tired of the endless bailout of Fannie Mae and Freddie Mac.  The public has also rejected the talking point that Fannie and Freddie were simply victims of a 100 year storm in the housing market.  So what’s Obama’s response?  To ask for public comment and have public forums.

This strategy is clearly one of delaying and avoiding any reform of Fannie and Freddie while pretending to care about the issue.  Where was the public comment and forums on the Volcker rule?  Seemingly the standard is that fixing the real causes of the financial crisis should be delayed and debated while efforts like the Dodd bill, which do nothing to avoid future financial crises, should be rushed without debate or comment.

Even more disingenious is couching reform of Fannie and Freddie under the rubic of “fixing mortgage finance”.  This is no more than an attempt to take the focus away from Fannie and Freddie and shift it to “abusive lending” and other non-causes of the crisis.

This isn’t rocket science.  The role of Fannie and Freddie in the financial crisis is well understood.  The only thing missing is the willingness of Obama and Congress to stand up to the special interests and protect the taxpayer against future bailouts.

A Perfect Storm of Regulatory Ignorance

Does the government know what it’s doing, can it know what it’s doing, in financial regulation? In the latest issue of Cato Policy Report, Jeffrey Friedman doubts it:

You are familiar by now with the role of the Federal Reserve in stimulating the housing boom; the role of Fannie Mae and Freddie Mac in encouraging low equity mortgages; and the role of the Community Reinvestment Act in mandating loans to “subprime” borrowers, meaning those who were poor credit risks. So you may think that the government caused the financial crisis. But you don’t know the half of it. And neither does the government….

Omniscience cannot be expected of human beings. One really would have had to be a god to master the millions of pages in the Federal Register — not to mention the pages of the Register’s state, local, and now international counterparts — so one could pick out the specific group of regulations, issued in different fields over the course of decades, that would end up conspiring to create the greatest banking crisis since the Great Depression. This storm may have been perfect, therefore, but it may not prove to be rare. New regulations are bound to interact unexpectedly with old ones if the regulators, being human, are ignorant of the old ones and of their effects….

This premise would be questionable enough even if we started with a blank legal slate. But we don’t. And there is no conceivable way that we, the people — or our agents in government — can know how to solve the problems of modern societies when our efforts have, in fact, been preceded by generations of previous efforts that have littered the ground with a tangle of rules so thick that we can’t possibly know what they all say, let alone how they might interact to create another perfect storm.

Read the whole thing – about moral hazard, banking regulations, and the “perfect storm of ignorance” that happened and will happen again – here in PDF. Less attractive HTML version here. Jeffrey Friedman is editor of Critical Review and of Causes of the Financial Crisis, forthcoming from the University of Pennsylvania Press.

Wednesday Links

  • David Boaz debates at The Economist: Is Obama failing? “In many ways, Obama has just doubled down on George W. Bush’s policies of bailouts, takeovers, expanded Fed powers and nationalizations. In a recession he is adding debt, taxes and regulation to the burdens already felt by business.” Readers can vote and join the debate.

Five Decades of Federal Spending

The chart below shows federal spending in three component parts over the last five decades. It includes Obama’s proposed spending in 2011. Here are a few thoughts on the recent spending trends:

Defense: In the post-9/11 years, defense spending bumped up to a higher plateau of around 4 percent of GDP. But now we have jumped to an even higher level of around 4.9 percent of GDP.

Interest: The Federal Reserve’s easy money policies reduced federal interest payments in recent years. That is coming to an end. Obama’s budget shows that interest payments will start rising rapidly next year and hit 3 percent of GDP by 2015. And that’s an optimistic projection.

Nondefense: This category includes all other federal spending. After a steady decline during the Clinton years to 12.9 percent of GDP, President Bush pushed up nondefense spending to a higher plateau of around 14.5 percent. Then came the recession and financial crisis, and the Bush-Obama tag team hiked spending to an even higher level of around 19 percent of GDP. That level of nondefense spending is almost double the level in 1970 measured as a share of the economy.

Financial Fiasco: ‘Best Books of 2009’

Johan Norberg’s Financial Fiasco: How America’s Infatuation with Homeownership and Easy Money Created the Economic Crisis has been named one of the best books of 2009 by the Spectator, Britain’s most important political affairs magazine. Excerpt:

Ever since the crash, I have been waiting for Johan Norberg to write about it – and finally, this year, he has obliged. I have three copies of his first book, In Defence of Globalisation, with varying degrees of annotation. I have already started to deface Financial Fiasco, his book showing how governments created this mess. The American government pumped up the housing bubble – and then there was a collective delusion that the market was rational. As Norberg says, the market is no more than a collection of humans who fall prey to hubris. And their hubris was imagining that computer models had eliminated risk: that the boom would not be followed by a bust.

It previously got an excellent review in the Financial Times. It’s enough to make you think that the elite British press are smarter than the elite American press.

Wednesday Links

  • Even though the government is running massive deficits, interest rates and inflation are low. So, what’s the problem?