Topic: Finance, Banking & Monetary Policy

Fannie Mae and Freddie Mac: The Toxic Duo

Treasury Secretary Timothy Geithner has finally unveiled details about his bailout plan. Not surprisingly, he plans on propping up insolvent (but politically influential) financial institutions. Even worse, there is no effort to shut down – or even reform – the two government-sponsored enterprises that deserve the lion’s share of the blame for the financial crisis. Yet as Peter Wallison of the American Enterprise Institute explains in this new video from the Center for Freedom and Prosperity, Fannie Mae and Freddie Mac are at the epicenter of the housing bubble and subsequent damage to financial markets.

America’s Problem: Too Little Government Lending!

Suffering through a massive housing bust spurred by the activities of utterly irresponsible government-sponsored entities such as Fannie Mae and Freddie Mac, may have led you to believe that the government should stop subsidizing the irresponsible and improvident.   Indeed, with government spending and lending off the charts, you might even have come to believe that Washington should cut back on its spending and lending. 

Silly you.

According to the Obama administration, more spending and lending is in order.  And by Fannie Mae and Freddie Mac.  Indeed, preparing the government for even more spending and lending apparently is the goal of current policy, which already includes a lot of spending and lending.

Christina Romer, Chairwoman of the Council of Economic Advisers, was interviewed by CNN’s John King on Sunday.  She helpfully sought to clear up the confusion exhibited by  those of us who thought the current economic crisis resulted from irresponsible spending and lending.  According to CNN:

KING: Mr. Liddy said he is going to break up AIG. Do we need to break up Fannie and Freddie?

ROMER: I think that is certainly going to be an issue going forward. I think it should be part of the overall financial regulatory reform, to figure out what is the best way.

Again, you know, anytime we have now got taxpayer money on the line, what we have an obligation to do is do it in a way that protects the American taxpayer. What is going to be the way that gets these institutions safe, gets them doing what we need them to do, which is lend like crazy, and just basically functioning again for the economy.

Of course. 

“Lend like crazy” really is the “just basically functioning” of Fannie and Freddie.  But it is beyond question that this behavior helped spark the current crisis.  Unfortunately, Dr. Romer does not explain exactly how we can make these fiscally irresponsible, money-losing organizations “safe.”  Nor does she enlighten us on how having Fannie and Freddie ”lend like crazy” will have better results than before. 

If this is the advice President Barack Obama is getting from what traditionally is one of the most economically responsible agencies in the executive branch, imagine what he is hearing elsewhere.  Buckle up, for the economic ride is likely to get much worse.

Education Journalism. Another Epic Failure

This weekend, the Washington Post took education secretary Arne Duncan to task for claiming that DC’s public school system has ”had more money than God for a long time.” Post education reporter Bill Turque notes a January 2009 study showing “that D.C., ranked against the 50 states, is 13th in per-pupil expenditures ($11,193).” The study he cites is the January 2009 edition of Education Week’s Quality Counts publication, which used “Department of Education data from 2005-06 (the latest year available).”

Is this finally an example of the investigative journalism I recently noted has been sorely lacking in education? Not exactly. The Post and Ed Week are reporting a figure that is less that half of what DC is actually spending on k-12 education this year.

Their first error is to imagine that the Dept. of Ed.’s 3-year-old data are the most recent available. As a few seconds of Googling demonstrate, the current year education budgets for the District are available on the website of DC’s Chief Financial Officer: here, here, and here.

What difference do 3 years make? Consider that total spending on education in DC has gone up in real terms over that period while enrollment has fallen from about 59,000 to fewer than 49,000 students. That alone has led to a dramatic rise in per pupil spending.

Next consider that Ed Week appears to have ignored capital spending (e.g., on building renovation and construction) from its calculations. So its “per pupil expenditures” are not the total per pupil figures that readers would naturally assume, they only cover part of the district’s spending (the part normally referred to as “current operating expenditures”). What difference does that make? Nearly $5,000 worth.

As I noted last year, “current operating expenditures” for DC were $13,466 in 2005-06 (Ed Week’s figure is lower because they applied a regional cost-of-living adjustment). DC’s total per pupil spending in that same year was $18,098. [Note that we have to infer that Ed Week excluded capital spending based on the numbers they report, because their table inexplicably fails to say what figures it is reporting.]

And finally, reporting old figures without adjusting for inflation understates how much was actually spent unless readers know to perform the inflation adjustment themselves.

So what happens when you add up this year’s total spending on k-12 education in DC and divide by this year’s actual enrollment? You end up with the real per pupil spending figure of $26,555.

So, secretary Duncan: you were right all along.

Any journalist or public official wishing an explanation of the current-year total per pupil spending figure cited above for Washington, DC  is welcome to contact me at acoulson(at) cato.org

More Cheap Money from the Fed

The Federal Reserve announced that it would create $1.2 trillion out of thin air and use it to buy mortgage-backed securities and Treasury bonds, even though

Some Fed leaders have resisted buying Treasurys in the past because they were unsure whether it would help reduce borrowing costs and because they feared that it would appear that the central bank was simply printing money to finance the government’s deficit, a hallmark of countries with poorly managed economies.

Slow Learners in Corporate America

They just figured this out? During the bruhaha surrounding bonuses paid by AIG,  reports the Washington Post:

The attack by lawmakers on AIG pay has provoked renewed complaints from some financial company executives that federal involvement in business decisions is making it difficult for struggling firms to return to profitability. In particular, executives say they need to offer bonuses to keep and motivate their most valuable employees and are already seeing an exodus of talent.

Duh, how could anyone in business not expect federal interference?  The government constantly meddles even when it is not bailing out everyone hither and yon.  But if it’s paying the corporate bills, how could anyone expect it not to get involved?

I have a novel idea.  Maybe business should stop going to Uncle Sam hat-in-hand asking for taxpayer alms.

Who’s Going to Buy All the U.S. Treasuries?

With Uncle Sam having to sell trillions of dollars worth of treasuries to finance all of the bailouts, stimuli, and normal wasteful spending, no one is sure whether foreign demand will continue.  The Chinese have bluntly questioned the safety of their U.S. holdings, and foreign demand has fallen in recent months.  Writes Brad Setser:

I wanted to highlight one trend that I glossed over on Monday, namely that foreign demand for long-term Treasuries has disappeared over the last few months. Consider a chart showing foreign purchases of long-term Treasuries over the past 3 months. Incidentally, the split between private and official purchases in this data should largely be ignored. The revised (i.e. post-survey) data generally have attributed nearly all the flow from 2003 to the official sector.

The rolling 3m sum bounces around a bit, but foreign demand for long-term Treasuries in November, December and January was as subdued as it has been for a long-time. Among other things, that fall in foreign demand for long-term Treasuries after October suggests — at least to me — that the big Treasury rally late last year (and subsequent sell-off this year) doesn’t seem to have been driven by external flows. Foreigners weren’t big buyers of long-term Treasuries back when ten year Treasury yields fell to around 2%.

It’s difficult to accurately predict future demand.  But U.S. borrowing will be truly staggering in coming years.  If international demand is down, the Treasury will have to rely on American investors.  Whether the domestic market can easily absorb so much debt – and particularly, to what extent federal debt offerings will crowd out private investment during what we hope will be a recovery – are questions that our spendthrift leaders have not bothered trying to answer.

Oh C’mon, NYT!

C@L readers know that I’m a fan of the NY Times’s news and business reporting. If you want depth and detail (especially today, when papers increasingly read like Tweets), the NYT’s news coverage is about as good as it gets.

The opinion page, sadly, is another matter.

Case in point, last Friday’s lead editorial chastising Japan and Europe for not adopting large fiscal stimulus plans. The lede:

The world economy has plunged into what is likely to be the most brutal recession since the 1930s, yet policy makers in Europe and Japan seem to believe there are more important things for them to do than to try to dig the world, including themselves, out.

That’s actually OK — the editorial board is free to believe (and espouse) that massive fiscal stimulus is the best policy for dealing with the current recession. But to use an old saying, they’re entitled to their own opinion, but not their own facts. Ignoring that admonition, the ed led off its final graf with this howler:

In a recent speech, Christina Romer, another of President Obama’s economic advisers, pointed out some lessons [sic] from the Great Depression: fiscal stimulus works.

If you follow the economic history literature, this is a stunner; some of Romer’s most important academic work demonstrates the opposite, namely that fiscal stimulus did little to get the United States out of the Depression [$] and subsequent U.S. recessions [$]. Has she rejected her own findings?

I tracked down the speech transcript and found out that, nope, she hasn’t; in fact, she was explicit that “fiscal policy was not the key engine of recovery in the Depression.”

Romer did go on to say that she strongly supports the Obama stimulus plan, believing it will be effective and worthwhile. But this belief is rooted in one school of economic thought (or ideology, to borrow from NYT columnist Paul Krugman), not history. Whatever the merits of Romer’s belief, the NYT’s line about the Depression proving that “fiscal stimulus works” is just plain horseradish.

In recent years, the NYT editorial board has repeatedly chastised non-progressives, claiming they put ideology over objective fact. Will the ed board scold itself?