Monday, July 21, 2008


From the July 19-25th Economist:
On July 13th Hank Paulson, America’s treasury secretary, stood on his department’s steps like some emerging-market finance minister, and unveiled an emergency plan to save Fannie Mae and Freddie Mac, two mortgage giants that owe or guarantee $5.2 trillion. Two days later, Ben Bernanke, chairman of the Federal Reserve, put the fear of God into the markets, warning Congress of a foul amalgam of inflation and economic distress.

The immediate lesson is that the financial crisis, nearly a year old, is far from over. Gloomy investors are gunning for banks of all types. In America the prices of houses and shares are falling, and the cost of food and energy has soared. Consumers are almost certain to cut back. The euro-area economy may have shrunk in the latest quarter. Central banks around the world are having to raise interest rates to curb inflation, and the dollar looks vulnerable. Even if the downturn proves less sharp than pessimists fear, it is likely to last longer than optimists hope.

Freddie and Fannie have changed that equation only slightly. Their importance lies in what their rescue says about the financial system. At Fannie and Freddie—and, shockingly, at the investment banks—the profits were privatised, but the risks were socialised. One Republican senator complained that he thought he had “woken up in France”.


OBloodyHell said...

Okay, an obvious question I'm going to have to respond to:

How much of the current issues with the two FM's (not to be confused with MFs, which is another matter) is tied to Clinton-era regulations, and how much is tied to Bush-II-Era regulations?

Because you KNOW they are going to try and pin all the problems on Bush, while we also know these things have been around for a long while and Clinton had a hand in their current structure, too.

Just as Clinton initiated extraordinary rendition as well as Project Echelon, which were "A-OK" as long as a Dem was in power, but hey, try and use them after an event like 911 when you are a Republican... fuggedaboutit.

So -- how much of the "screwup" (hey, a government screwup. Whodathunkit?) is due to Clinton, and why?

Anonymous said...

Before FM and FMac interest rates were 2-5% and people needed to be qualified to get mortgages.

After FM and FMac and their extremely plush offices and extremely high salaries and benefits, interest rates were 7-13% and mortgage lenders no longer had to worry about repayment since the paper was flying off into the hands of strangers.

Perhaps Fannie and Freddie were fraudulent at the very beginning.

Jimmy J. said...

I've been around a few years. Fannie was started in 1938. My earliest recollection of interest rates was in the 1950s when rates were about 4.5-5.75% Generally you could borrow from a savings and loan for 1% above what they were offering to their savers. If you got a GI loan you needed no down payment. The government guaranteed the first 25% of the GI loan. In other words the lender knew he had 75% of the property value as his risk. That program worked out well and allowed a lot of people to own their homes.

It was only in the late 70s that mortgage interest rates went above 10%. I had a mortgage at 13% during those years.

As recently as 2003 I had a 4.25% 30 year fixed mortgage. Rates were very low that recently and were one of the reasons for the housing boom.

Things have not been well managed at the GSEs in the last ten years, but they are hopefully going to come under greater scrutiny now. They have been a haven for political favors for many years and some of the recent CEOs and assistants have lined their pockets.

It seems that about 1% of their mortgages are non-perfoming. That is a very manageable figure. Unlesss it gets much worse, there is no reason to lose confidence in the GSEs. The shorts are having a field day with the stock because of all the rumors, which are probably spread by big short sellers.

There are some ideas floating around as to the best way to privatize them and cut them loose from the government. That will be a major battle because, as I said, they have been used to pay political favors for some years now. The pols don't want to lose that perk.

Home ownership would be much less if they had not been around. 70 years for Fannie and most of them doing a good job helping people get loans to buy homes.

Carl said...

I'm not a finance guy--and wonder what MaxedOutMama thinks. But with that caveat, my view is that whatever the historical need for Fannie and Freddie as government chartered corporations, the expanding free market ended any future justification.

Anonymous said...

Jimmy and others: What about Fannie and Freddie adding layers and layers of people receiving big fat pay checks and more, while the market place did the work of moving paper around with automaticity? What were all those employees doing? And what about removing incentives for lenders to be assured that borrowers were able to repay the loans? Look what a colossal, damaging effect that had!