Topic: Finance, Banking & Monetary Policy

Administration Playing Both Sides on Fannie Mae

On Friday the Obama Administration released its report on “reforming America’s Housing Finance Market.”  The report claimed that the Administration would work toward “winding down Fannie Mae and Freddie Mac on a responsible timeline.” 

While the report was silent on what a responsible timeline would be (surprise, no details); I assumed, perhaps naively, that a reasonable timeline would be 5 to 6 years.  So you can imagine my surprise while reading the Administration’s budget proposal (see Table S-12 of the summary tables), released Monday, that the Administration is projecting that the government will be receiving, between 2012 and 2021, $89 billion in dividend payments from Fannie Mae and Freddie Mac.  In 2021 alone the White House projects $8 billion in dividend payments.  But here’s the rub, for Fannie Mae and Freddie Mac to be paying dividends in 2021 requires that they still be around.

So would the Administration please be straight with us for just a minute: are you or are you not proposing that Fannie Mae and Freddie Mac disappear; and if so, when?

Another odd thing from the budget, again Table s-12 lists the net equity position of Fannie and Freddie as negative.  Well that’s obviously true, but it also raises the question of why they are still in conservatorship, as the law requires them to be taken into receivership once they’ve reached negative equity.  Then perhaps OMB and Treasury have different definitions of net equity.

Austrian Economics in the News

The financial crisis of 2008 led to a lot of unfortunate Keynesian and corporatist policymaking, but also to a renewed interest in Austrian economics and particularly to the Austrian theory of the business cycle and the role of the Federal Reserve in creating bubbles and busts. Austrian ideas are most recently examined on BBC and in the Washington Post.

Sales of F. A. Hayek’s book The Road to Serfdom have soared in the past three years, actually hitting no. 1 on Amazon last summer. The New York Times complained that Tea Party activists had “reached back to dusty bookshelves for long-dormant ideas [in] once-obscure texts by dead writers” such as Hayek, even as its reporters continually urged policymakers to Read. More. Keynes. A rap video on the intellectual battle between Hayek and Keynes, created by economist Russell Roberts and filmmaker John Papola, has been viewed almost 2 million times. A YouTube cartoon video on “quantitative easing” has done even better, with more than 4 million views.

And now Rep. Ron Paul’s appointment as chairman of the House subcommittee on monetary policy has brought new attention to the Austrian critique of orthodox economics and economic policy. A long article on Paul’s ideas and his plans for the committee by Annie Lowrey filled a full page of the Sunday Washington Post:

But Paul’s adversary is not only the Federal Reserve. It is also mainstream monetary economics itself. As a devotee of the Austrian school, whose luminaries include Friedrich Hayek and Ludwig von Mises, Paul stands firmly outside policymaking and academic circles, a point he enthusiastically admits. (The Austrian economists also often quibble with other libertarians, such as those at Cato.) His beef is not with how central bankers do their jobs; it’s with central banking itself.

“The Fed, rightly so, criticizes Congress for spending too much - but they make the money available to us!” he said. “It buys debt, keeps interest rates low, and sticks it to the people who want to save and make money. It is so unfair. And I think it is the first time in the history of the Fed that people realize it is not their friend. It just gives us booms and busts.”

The line about Cato is a little misleading. At our 28 annual monetary conferences and in our publications, we’ve presented the ideas of many Austrian economists, from our 1979 publication of two classic manuscripts by Hayek, A Tiger by the Tail: The Keynesian Legacy of Inflation and Unemployment and Monetary Policy: Government as Generator of the “Business Cycle” and our first monetary conference in 1982 featuring Fritz Machlup and Gottfried Haberler, to a 1999 issue of the Cato Journal featuring studies of Hayek and Ludwig von Mises, to a new Working Paper, “Has the Fed Been a Failure?” by George Selgin, William Lastrapes, and Lawrence H. White.

And don’t miss a recent BBC program, “Radical Economics: Yo Hayek!” Jamie Whyte spends 30 thoughtful minutes looking at Austrian views of boom and bust, with such guests as White, Papola, Steven Horwitz, Robert Higgs, and Robert Skidelsky.

It took the biggest bubble and crash since 1929 to revive the interest in Austrian economics, but at least now more people are studying the real problems with central planning, government intervention, and money manipulation.

Administration Punts on Reform of Fannie and Freddie

Remember that “tough study” promised by Senator Chris Dodd to deal with Fannie Mae and Freddie Mac?  Well it is finally out.  All 22 pages (of doubled-spaced large font).  And less than half those pages actually discuss Fannie and Freddie.

While the report does say a lot of the right things — such as protecting the taxpayer — it is awfully short on any real details.  And in many areas, the report makes clear that the Obama administration intends to keep the taxpayer on the hook for future losses arising from Fannie and Freddie.  For instance, after assuring us that the GSEs will have sufficient capital to meet their obligations, including debt, the report tells us that such capital will not come from investors, but from the taxpayer.  One has to wonder whether this report was written for the benefit of the Chinese Central Bank (one of the largest GSE debtholders) or for the benefit of the U.S. taxpayer.

Equally vague is the discussion of “winding down” Fannie and Freddie.  While that sounds great, how is this to be accomplished? And how long will it take?  Again it seems that this “wind-down” will be financed by the taxpayer.  It is suggested that the GSE guarantee fees will increase.  Again, by how much and when?

Paragraph 2 of Section 1074 of the Dodd-Frank act, which required this study, also requires an “analysis” of various options and impacts.  In all due respect to HUD and Treasury and their efforts, there is nothing in this report that remotely resembles an “analysis” — just vague generalities.

I appreciate the administration’s stated desire to move us closer to a private market solution, but we’ve heard these empty promises before.  Remember that financial reform was going to end “too big to fail” and bailouts?  Health care reform was going to “bend the cost curve”?  It is past the time of fluff.   We need actual details and an actual plan.  

For details of immediate action that can be taken, see my testimony from earlier this week.

Chutzpah in the Bailout Nation

Bloomberg reporter Andrew Frye plays it deadpan here.  I don’t think I need to comment, either, except to note that the taxpayers’ commitment to AIG peaked at $182 billion:

American International Group Inc.’s mortgage insurer does more business in Republican-leaning states as it signs up more reliable customers than those in “more liberal” areas, Chief Executive Officer Robert Benmosche said.

“All of the states where we’re a leader, where we’re the No. 1 insurer, are red states, all of the states where we’re at the bottom are blue states,” Benmosche, 66, said yesterday at a conference in Washington. “Part of what we found out is that our model is about culture and it’s about the attitude in the public. And what we find is where there’s more of a tendency for people to be more liberal, more that the government is responsible for what happens to me.”

Benmosche oversees an insurer propped up by more than $40 billion in government capital while competing mortgage guarantors operate without U.S. Treasury Department assistance.

More on chutzpah in the Bailout Nation here and here.

For-profits Fighting Back, Harkin to Flog-on

Last week, Sen. Tom Harkin (D-Iowa), chairman of the Senate Health, Education, Labor, and Pensions Comittee, announced that on February 17 he will continue his obssessive attack on for-profit colleges, holding yet another hearing to determine just how evil profit-seekers are.  At least, that is what will presumably be discussed — the specific subject of the hearing is yet to be identified. But the committee actually tackling, say, rampant waste throughout higher education driven by federal student aid, or just giving for-profit schools an even-handed treatment, would be too huge a turnaround to contemplate.

Despite there being no end in sight to Harkin’s seige, for-profit institutions aren’t just rolling over, and today they launched their latest counterattack. This afternoon the Coalition for Educational Success — a for-profit college advocacy group — filed a lawsuit against the Government Accountability Office. At issue: The GAO’s ”secret shopper” report on for-profit institutions that was eventually — but very stealthily — revealed by the GAO to be riddled with errors, and which could be shown to be an even bigger smear job were the GAO to allow for-profit schools to examine the evidence behind the report. 

Clearly there will be more to come on this, if for no other reason than Harkin’s show-hearings have garnered a lot of coverage in the past. Hopefully, this time potentially disturbing behavior by the GAO, as well as the huge problems federal policy has created throughout higher education — you know, the really important stories — will also get a little attention.

Misunderstanding Inflation through the Years

NPR reports on rising food prices across the world. They may have played some role in the revolts in Tunisia and Egypt, and if so, those wouldn’t be the first revolutions sparked by inflation. NPR reporter Marilyn Geewax mentioned several reasons that food prices are rising – droughts, floods, oil prices, financial speculation – but not the obvious one: the continuing creation of unbacked money by central banks around the world. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” And as Jerry O’Driscoll wrote just two weeks ago, about rising food prices, “Inflation is here.” But that point isn’t yet universally understood, at least not at our government radio network.

Anyway, I turned off the radio and turned on the television, where TCM was just broadcasting the 1942 MGM propaganda film “Inflation” (made at the request of the Office of War Information but then never released because it was too anti-capitalist even for wartime propaganda). Edward Arnold plays the Devil, in league with Hitler and posing as a businessman who who encourages people to buy more, evade price controls, stockpile goods, and use the black market. (The film was made by Cy Endfield, who had been a member of the Young Communist League at Yale and went on to make such films as Zulu and Universal Soldier.) The film features what appears to be President Franklin D. Roosevelt’s April 28, 1942, radio speech, “Total War and Total Effort.” As the young couple in the film go to buy a new radio, the shopkeeper turns on the radio and they hear FDR say:

You do not have to be a professor of mathematics or economics to see that if people with plenty of cash start bidding against each other for scarce goods, the price of those goods (them) goes up.

Yesterday I submitted to the Congress of the United states a seven-point program, a program of general principles which taken together could be called the national economic policy for attaining the great objective of keeping the cost of living down. I repeat them now to you in substance:

First. we must, through heavier taxes, keep personal and corporate profits at a low reasonable rate.
Second. We must fix ceilings on prices and rents.
Third. We must stabilize wages.
Fourth. We must stabilize farm prices.
Fifth. We must put more billions into War Bonds.
Sixth. We must ration all essential commodities which are scarce.
Seventh. We must discourage installment buying, and encourage paying off debts and mortgages.

As it happens, I have a 1942 OWI poster with that same message hanging in my kitchen:

In fact, of course, price inflation was the natural result of a substantial increase in the money supply before and during the war. All of FDR’s policies – cartels, destruction of crops, wage and price controls, rationing – were misguided attempts to deal with the consequences of monetary manipulation and other bad policies.

By the way, FDR famously said, “The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something.” Which might explain another propaganda film produced by MGM, this one in 1933, that extolled the virtues of FDR’s policy of inflation, utilizing the argument that is variously called “stimulus” or “the broken window fallacy.” The film cited the successful results of Civil War inflation. “What inflation has done before it will do again! … What a man! And what a leader! Yowzer! Happy days are here again!” Yeah, that went well. And by 1942 MGM was back on board, making a government propaganda film opposing inflation.

For background on inflation, read Cato adjunct scholar Lawrence H. White at the Concise Encylopedia of Economics.

Fannie & China: 2 Birds, 1 Stone

Chinese President Hu Jintao’s visit to Washington brought renewed focus on China’s currency.  It was likely the largest point of discussion between President Obama and President Hu.  I suspect a less public, but related, issue was China looking for some certainty that America would make good on its obligations; after all, China is our largest lender.

What is often missed is the connection between these two issues:  currency and debt.  When China receives dollars for the many goods it sells us, instead of recycling those dollars into the purchase of US goods, it uses that money mostly to buy US Treasuries and Agencies (Fannie/Freddie securities).  These large Treasury/Agency purchases (foreign holdings of GSE debt are over $1 trillion) have the effect of increasing the demand for dollars and depressing that for yuan, resulting in an appreciation of the dollar relative to the yuan.  This connection exposes the hypocrisy of President Obama’s complaints about China currency manipulation - without massive US budget deficits, China would not be able to manipulate its currency to the extent it does.  If the US wants to end that manipulation, it can do so by simply reducing the outstanding supply of Treasuries and Agency debt.

Another solution, which would also do much to end the “implicit guarantees” of Fannie Mae and Freddie Mac, is to take Fannie and Freddie into a receivership, stop the US taxpayer from having to cover their losses, and shift those losses to junior creditors, which include the Chinese Central Bank.  Were the Chinese to actually suffer credit losses on their GSE debt, they would quickly start to reduce their holdings of such.  They might also cut back on Treasury holdings.  These actions would force the yuan to appreciate relative to the dollar.  And best of all, it would end the bottomless pit that Fannie and Freddie have become.  It is worth remembering that even today, under statute, the Federal government does not back the debt of Fannie and Freddie.  It is about time we also teach the Chinese a lesson about the rule of law, by actually following it ourselves. 

Of course this would increase the borrowing costs for Agencies (and maybe Treasuries), but then if China were to free float its currency, that would also reduce the demand for Treasuries/Agencies with a resulting increase in borrowing costs.  We cannot have it both ways.