Wednesday, September 10, 2008

Fannie Mae and Freddie Mac

Well, I started to get into Fannie Mae and Freddy Mac back in July (here)... but then didn't finish it. There's a lot of hollerin' goin' on about this.


1. Should the government be bailing Fannie Mae and Freddy Mac out?

2. What kind of problems is this now going to create?

Liam said:

It's definately a 'damned if we do/damned if we don't' situation...

If the gov't doesn't bail them out and they fail the repercussions are going to be horrendous.

Then again if we do... well what's preventing other companies from saying "Hey we need help or we're going to fail too!"

Honestly I don't know...

Two Dogs said:

I absolutely, positively think that Fannie Mae and Freddie Mac should have never been formed. While all of the PRO-big government morons (fascists, by definition) keep saying that they were privately run, the fact of the matter is that they both enjoyed HUGE advantages over the truly private businesses and still failed like a bunch of government constructed levees around New Orleans. What people refuse to understand is that the very PROBLEM with both entities was caused by the government forcing relaxed lending standards, while screeching racism. The government CAUSED the problem by forcing lenders and financial institutions to give money to those that couldn't afford it.

I think of the time that my wife and I went to get a construction loan to build our house. Our banker told us that we qualified for over 400k. I looked at Ca and told her that we should immediately remove our money from their bank because they were idiots. I couldn't have afforded the monthly interest on that loan with our current debts, much less the principal. And they were all smiles because they were forced by the federal government to use government standards, the bankers had no input.

Sharing needles with someone that has AIDS will cause you to get it. Stay away from PRO-big government morons, or you will get stupidity by osmosis. Look at the Democrats that seem intelligent and their philosophical changes in minutes upon reaching Washington. They are led by idiots. Osmosis, I tell ya'.

1. Rip the Band-Aid off, it will stop hurting soon enough, IF we do not do anything more to reduce the pseudo-free market economy that we enjoy, you know, like elect MORE big government morons. Pelosi, Boxer, Biden, and Obama immediately come to mind. Thousands upon thousands of cliches cover this topic. Let the chips fall where they may. Now, you pick one. I can think of minimally seven right off the top of my head that apply. Guess which ones?

2. None that an unfettered economy cannot absorb. Yes, we will take a hit instantly, but removing the bonds of slavery is never easy. I think about how FDR's policies caused the Great Drepression to extend three times longer than necessary. It is the exact same circumstance. Even the Jews imprisoned in Auschwitz by Barry's philosophical predecessor were denied food because it would have killed them in large amounts.

None of what I have written is over the top to me or any thinking person. I stand by every single word with evidence and proof rooted in nothing but math AND history.

BLBeamer said:

1. No

2. If anything, unfortunately it will make politicians' complaints about Enron, World Com, and other frauds less valid. It should (but probably won't) give pause to those who say such quasi-governmental institutions are necessary because of the inherent inferiority of markets.

OSO, I'm not referring to you.... this time. ;)

One Salient Oversight said:

1. Yes. There was actually no other choice. F&F were backed by government guarantee and if the US government had refused to bail them out it would be tantamount to reneging on government bond payments. The Bear Stearns rescue was different as it was a private organisation and probably should not have happened. If Bush and Paulson rescue Lehman then Nouriel Roubini's charge that America is the world's largest socialist state will be proven true.

2. As I just mentioned, the problem is whether or not large financial firms should be the subject of government bailout. Like Two Dogs I believe that F&F should not have been created in the first place or should have been completely privatized long ago. The fact that F&F were guaranteed by government meant that it was only a matter of time before taxpayers would have to pay the bill.

The housing market is one market that I believe that the government should really leave alone. The best of intentions to make housing affordable can, in fact, exacerbate and distort the marketplace.

F&F were not responsible for the housing bubble's inflation and subsequent popping. They were, nevertheless, victims of it.

While it is true that the housing market essentially caused the bubble and thus its own demise, this has more to do with irresponsible monetary policy by the Federal Reserve than a "market failure".

Put simply, the Fed's interest rates were too low between 2002 and 2005. During that period, America was experiencing negative real interest rates. The housing bubble grew exactly during that period.

Discussion continues in the comments.


Roland Hulme said...

Hate to even moderately agree with Two Dogs, but Freddie and Fanny were kind of ALREADY govt bodies and their well-intentioned problem was giving out money to people who couldn't repay it.

Two Dogs said...

Roland, your obvious bigotry towards us people that were here first (we that are the offspring of feather Indians.) and the subsequent automatically contrarian viewpoint hurts my little feelings.

Please accept that for what it was, completely tongue in cheek. Humor is good.





BLBeamer said...

As usual, OSO provides a thoughtful answer. I still believe the answer is no, but OSO makes a good case for why someone might believe otherwise. However, I still believe that Fannie Mae is a relic of the New Deal and should be allowed to die.

I did not use the term "fraud" loosely. Fannie Mae has a history of not being held to the same rules privately backed lenders must follow. In about 2000, Congress held hearings to examine their practices due to long standing concerns raised by journalists and others. In 2003 or 2004, Fannie Mae once again came under investigation for numerous accounting "errors" including shifting losses to other periods so executives could collect performance bonuses. When Enron and WorldCom did the same thing, this practice was called fraud, and rightfully so.

Fannie Mae spent billions of dollars to fix their books, and ended up restating earnings. I don't recall the precise figure but it was upward of $5B.

Then, in late 2006, CEO Franklin Raines (a fellow Seattle native) and other officers of Fannie Mae were indicted for - among other things - manipulating earnings.

Due to the development of mortgage and other capital markets in the last 70 years since its founding, its purpose and usefulness have passed. It is time to let Fannie Mae die.

But I do agree 100% with OSO that US interest rates were too low in 2002-2005 and, coupled with out of control spending on the part of Congress and the administration, set the stage for all the roosting chickens we are seeing now.

One Salient Oversight said...

Beamer's comments here are important. F&F had shareholders like any business on the stockmarket but had a government guarantee to pay off debt hanging behind it.

This meant that the people who ran the organisations were more likely to make bad decisions in the face of a financial environment that punished anyone with money in the bank and rewarded anyone who threw money into an investment bubble.

Private businesses also made this mistake - but with F&F the liability for this mistake was transferred from shareholders to tax payers.

If this recession and housing collapse continue, I would hate to think just how much F&F added to Federal Government Debt. Part of me is now hoping for a McCain/Palin win so that they can take the political hit and prove just how deadly Republican party economics has been to the economy.

But, if that were to happen (McCain/Palin getting into office and enacting standard Republican economic policy ie cut taxes and to hell with the deficit) then America will be an economic basket case by 2012.

Two Dogs said...

Sorry, I am late leaving for the coast this morning, yet I cannot allow ridiculous things like those stated by OSO to stand without challenge.

Most people fail to realize that our country was founded upon the premises of individual liberties and freedom FROM government.

To flippantly state that about McCain/Palin getting elected is irresponsible. Our media is going to make sure that Republicans get blamed for anything that goes wrong because they have an agenda. They are for the most part admitted Marxists. Go all the way back to 1915 and read papers, you can see it. That class of people has sat and waited, passing incremental legislation to ease us into the failing system of government that oppresses us.

We currently have a two party system, one that believes HALF of what our founding fathers believed and one that believes NONE of it.

To be for a guy that only has "Has not gotten his head stuck in a bucket" as his only accomplishment in his entire life just because he has a "D" by his name shows you that even intelligent people can state ridiculously stupid things.

There is a reason that people envy our country, it's because we are the only leaders left on the planet.

One Salient Oversight said...

So I guess you'll be voting Republican this time around two dogs?

Two Dogs said...

Good call, OSO, I work so therefore I have to vote for Republicans, I really have no choice. Maybe if I had been born with the deadbeat genes, I could pull the lever for Barry, but alas, I have a brain.