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Tilting at Windmills

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July 14, 2008
By: Kevin Drum

FANNIE & FREDDIE....TAKE TWO....Last night I linked to "There Goes the Neighborhood," a 2004 piece in the Monthly about the housing bubble. It was written before the subprime market really took off, and among other things, it placed a share of the blame for the bubble on Fannie Mae and Freddie Mac.

Was that right? If you're interested in more, check out Paul Krugman today, who essentially argues that F&F aren't really to blame, and then Tanta at Calculated Risk, who argues that although there are other, bigger culprits out there, F&F bear more responsibility for the housing bubble/collapse than Krugman admits. All three pieces together make pretty good reading.

And while we're on the subject, isn't it sort of amazing that we've seen the collapse within a few months of Bear Stearns, IndyMac, Freddie Mac, and Fannie Mae — and we aren't in even worse shape than we are? In a perverse way, it's a testament to our economy that we can absorb so much catastrophe in such a short period of time without even more pain than we've already suffered. Keep your fingers crossed.

Kevin Drum 12:27 PM Permalink | Trackbacks | Comments (32)

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Amazing, yes. However, the news about F&F has me quite worried, waiting for the next shoe to drop.

The collapse of a number of large institutions in such a short time frame has me greatly concerned that the worst is still yet to come. And if the government insists on bailing out all of these places, I worry greatly about what that means for the long-term health of our economy.

Posted by: David Bailey on July 14, 2008 at 12:31 PM | PERMALINK

These big firms have collapsed, and we still have as well economy?

#1 - Do we know that yet? And haven't actual people lost actual money, i.e., pensioners, etc.? Or have I misunderstood where the money has been lost?

#2 - If there *hasn't* been any damage, it's because super-double-whammy rich people are now only super rich. Isn't that an indictment of who gets rich from what kind of economic activity?

Posted by: Piehole on July 14, 2008 at 12:32 PM | PERMALINK

“As through this world I’ve wandered, I’ve seen lots of funny men;
Some will rob you with a gun; And some with a fountain pen."

Woody Guthrie

Posted by: MsNThrope on July 14, 2008 at 12:35 PM | PERMALINK

Whatever the merits of Reagan's presidency, wasn't it he who relentlessly promoted the deregulation that's led to the savings & loan, crisis, Enron and these recent collapses?
I'm willing to concede that regulation can be overdone and corrections are necessary, but eliminating regulation altogether? Unwise.

Posted by: Alan in Toledo on July 14, 2008 at 12:38 PM | PERMALINK

Kevin

You sound like somebody whistling past the graveyard.

Freddy and Fannie are simply teetering. They haven't collapsed yet. They are too big to fail. The government is already stepping in to shore them up.

By the way, just think about all those folks who had less than $100,000 in IndyMac. FDIC is going to protect them. The Southern California rich on the other hand are standing in line outside the door at IndyMac.

Posted by: Ron Byers on July 14, 2008 at 12:39 PM | PERMALINK

Let's no forget that the Fed has been backstopping a lot of dodgy CDOs and the like.

I also note the Fed's tally of revolving debt and the national debt aren't really al that pretty.

Posted by: jhm on July 14, 2008 at 12:40 PM | PERMALINK

And while we're on the subject, isn't it sort of amazing that we've seen the collapse within a few months of Bear Stearns, IndyMac, Freddie Mac, and Fannie Mae — and we aren't in even worse shape than we are?

But something is happening here and you don't know what it is, do you, Mr. Drum?

'Our debt problems today are of a magnitude so extreme that astronomers would be hard pressed to calculate them. By any rational measure our society is comprehensively bankrupt.' - Jim Kunstler

Posted by: MsNThrope on July 14, 2008 at 12:56 PM | PERMALINK

This sounds like more of the same that I've been hearing for several years now. The old line was that "the American consumer is amazingly resilient", because he/she kept on consuming in spite of weak income. But this was actually just a symptom of the even more serious problem (than having slow growth) of living beyond one's means.

The government has stepped in repeatedly to attempt to rescue the economy, but in a way this has just masked the "too big to fail" problem. So a failing economic structure is kept in place only through repeated government intervention in the marketplace. Meanwhile, the real economy has continued to deteriorate and this shows no signs of abating. We could be in worse shape, and it appears that we will be...

Posted by: Detroit Dan on July 14, 2008 at 1:02 PM | PERMALINK

No. It's a testament to Bernanke's magic money printer and the negative savings rate. It's not a good sign; it's actually a sign of impending catastrophe, made worse by bailing out millionaires at the expense of the middle class. It will catch up with us at some point. The longer it takes, the worse it will be.

Posted by: Chief Angry Cloud on July 14, 2008 at 1:16 PM | PERMALINK

without even more pain than we've already suffered.

People earning below the median income are hurting, but they don't count in America.

Posted by: Brojo on July 14, 2008 at 1:18 PM | PERMALINK

Oh, stop your whining

Posted by: Dr. Phil on July 14, 2008 at 1:27 PM | PERMALINK

Best capsule so far is here:

Five Things You Need to Know: Contrary to Popular Belief, Math Is Not a Rumor
Kevin Depew Jul 14, 2008
http://www.minyanville.com/articles/government-GSE-fre-fnm-Freddie-fannie/index/a/18004

[snip]

Fannie Mae was actually created as a government institution. It was de-nationalized (privatized) in 1968 in order to balance the budget, which if we really think about it is hilariously ironic. Fannie Mae was basically one of the first government "off balance sheet" vehicles.

As we wrote in March:

"Now, after 40 years of enriching private shareholders via the company's government sponsored and enabled business model, the reality, given the debt crisis and the magnitude of the collapse of the real estate market, is that Fannie Mae will almost certainly necessitate being re-privatized and returned to its original owner.

Put another way, the government will be forced to take this off balance sheet vehicle back onto its balance sheet just like banks are being forced to do with a wide variety of their own off balance sheet vehicles."

That no one cares about this, or is upset by it, and that most consider anyone who suggests there is anything wrong with this picture is "wearing a tinfoil hat," speaks to the depth of denial in the marketplace.

We really have no problem with private citizens profiting from their investments in Fannie Mae, as has been the case for most of the past 40 years; we just have a problem with the company's debt and future obligations being forced onto the backs of taxpayers now that the ability for private citizens to profit from the company's business model has run its course.

Like it or not, that is what is happening with Fannie Mae and Freddie Mac. And that's why we should all be outraged over it.

[snip]

Posted by: MsNThrope on July 14, 2008 at 1:29 PM | PERMALINK

Damned if they use my hard earned investment tax dollars to prop up investment institutions. They can damned well borrow the money needed from the Chinese.

Posted by: Amerlcan Hawk on July 14, 2008 at 1:34 PM | PERMALINK

It's not a testimony to our fundamentally good economy. It's a testimony to the fact that following the end of the cold war conservatives have systematically dismantled the checks imposed on the financial system by the New Deal-era politicians, and now we are right back in the pre-1929 era of crony capitalism, with massive income inequality, boom and crash, bank collapses, uninhibited exploitation of worldwide labor and the environment and all the other exciting features of the Gilded Age economy, once of which was regular financial panics.

Robber barons make money. Ordinary people lose. Whether it's a good idea or nor generally (it does generate technological innovation, since some forms of risk are so richly rewarded) is still open to question, but the pattern is familiar.

Posted by: Diana on July 14, 2008 at 1:42 PM | PERMALINK

If Fannie and Freddie had not allowed mortgages with only 3% down - and then encouraged originating banks to provide loans to cover that 3% - we would not be in this situation today. Thank you, Franklin Raines and your protectors in the Democratic Party.

Posted by: DBL on July 14, 2008 at 1:42 PM | PERMALINK

We're only at the beginning of the crisis, Kevin. Thinking we're through it is a mistake.

When people say things like, "Hey look, all you sky is falling people are total pessimists -- look how much punishment our economy can take," I'm always reminded of a friend of mine from high school.

This friend drank like a fish and drove like a maniac, and we were all sure he'd be dead before he finished high school.

Well, we were wrong: the kid survived high school.

Then, two years later, he wrapped his Mustang around a telephone pole. And died.

Yup, we sure were wrong about that guy.

The lesson is this: just because bad stuff doesn't happen on the schedule that the pessimists predict doesn't mean the bad stuff ain't still coming.

Posted by: Nils on July 14, 2008 at 1:46 PM | PERMALINK

I see us winding up somewhere between BladeRunner and Mad Max!

Posted by: Pitchforks R Us/Heads on Pikes on July 14, 2008 at 2:00 PM | PERMALINK

I've seen and talked to quite a few economists and business people over the years and most of them have been surprised the U.S. economy hasn't done worse with all of its deep, underlying problems. But that seems to be the strength of the service economy - as long as people keep spending money, it can keep slowly going no matter how many body blows it takes. But the weakness of the service economy is that - if people ever stop spending money, the whole thing falls apart.

The question is, will we fix the real problems in our economy or will the illusion of spending-fueled growth lead us fully into fiscal End of Days.

Mike

Posted by: MBunge on July 14, 2008 at 2:22 PM | PERMALINK

A logical deduction would be that we are in worse shape than we seem.

Posted by: Bruce Wilder on July 14, 2008 at 2:23 PM | PERMALINK

"...it's a testament to our economy that we can absorb so much catastrophe in such a short period of time without even more pain than we've already suffered. Keep your fingers crossed."

Hat tip to Federal Reserve Chairman Ben Bernanke, who has really pushed the envelope over the last year or so. Methinks Greenspan would have lacked sufficient creativity.

And notwithstanding yesterday's naysayers, there are no signs of emergent hyperinflation or even double digit inflation.

Posted by: Measure for Measure on July 14, 2008 at 2:31 PM | PERMALINK

It's also a testament to our culture that we can absorb so much catastrophe in almost eight years without even more pain than we've already suffered.

Posted by: Juanita de Talmas on July 14, 2008 at 4:02 PM | PERMALINK

Funny (well not really) how the Republicans seem gleeful to argue that we're insolvent when they've recently said a $10 Trillion debt is not important.

Funny how they argue we're teetering on the brink of total extinction when the president himself says the economy is sound.

Funny how they always say things are bad just before they push it over the cliff's edge.

It's CYA for the criminal act they're about to commit. But..."nobody could've expected" it.

Posted by: MarkH on July 14, 2008 at 5:21 PM | PERMALINK

A lie is a statement known to be untrue at that time.

-neil boortz (libertarian(?) Talk Radio

Posted by: slanted tom on July 14, 2008 at 6:15 PM | PERMALINK

It's probably so obvious someone else has posted about it already anyway - but here goes:

"In a perverse way, it's a testament to our economy that we can absorb so much catastrophe in such a short period of time without even more pain than we've already suffered. Keep your fingers crossed."

Actually, I think something simpler - and more sinister - is at work. All of the really bad stuff is being shoved down the road till after November, when it'll be someone else's problem.

Make your emigration plans now, or stockpile food if you plan to stick around. I'd really like to be wrong about this, but if you look at the way everything else has gone in the last 7 years.....

Posted by: xaxnar on July 14, 2008 at 6:59 PM | PERMALINK

And while we're on the subject, isn't it sort of amazing that we've seen the collapse within a few months of Bear Stearns, IndyMac, Freddie Mac, and Fannie Mae — and we aren't in even worse shape than we are?

In the first place, only IndyMac "collapsed" in the sense that it was taken over. The rest of those you named are being bailed out before those who made the bad bets could feel the pain. This is all happening at the US tax payer's expense and the consequences will be felt for a long time. The US financial system's credibility, Fed's credibility, the notion that the US is a capitalist nation etc are all taking a huge hit and this will have consequences because we depend on inflow of foreign investments/funds to maintain our standard of living.

Posted by: rational on July 14, 2008 at 7:08 PM | PERMALINK

Do you guys have any idea what would happen if FNM and FRE collasped?

Do you guys ALSO know what would happen if the gov stepped in and backed FRE and FNM ?

For the 1st point, look at the % of mortgage funding that originates with FNM and FRE in the US today.

For the 2nd point, look at the TNX action LAST FRIDAY during trading hours when rumours that the gov were going to do just that were floating around.

Put the pieces together and you will start to comprehend the box that the Fed/US gov is in.

Now think, if you were the Fed/US gov, what will you do ?

Think through it - remember to take some deep breaths at the end.

Posted by: lolcat on July 14, 2008 at 9:44 PM | PERMALINK

Krugman's piece is deeply ignorant; almost ridiculously so for a guy with his reputation. Krugman writes that conforming Freddie and Fannie loan require substantial downpayments. This is plainly false. He also incorrectly states that Fannie and Freddie did not buy sub-prime paper. Also plainly false.

Krugman should be embarassed.

Posted by: Will Allen on July 14, 2008 at 9:57 PM | PERMALINK

Yes, I have been thinking about this quite a bit for the last few years. The box you are referring to is one made by the US govt and the Fed in the first place. The outrage against the bail out is not for the bail out per se but at the fact that they provided the impetus for this bubble and looked the other way when problems were piling up and profits were booked by crooks. Now, after shit hit the fan, they decide to step in and bail out their wealthy friends at the expense of the taxpayer.

Bailouts should be reserved for totally unexpected events and phenomenon (e.g. 9/11), not for something as obvious as the fact that shit will happen if you lend money to folks without checking their ability to repay (no-doc loans, for example).

Posted by: rational on July 14, 2008 at 10:00 PM | PERMALINK

A testament to our economy? Economic effects follow the financial puke with a lag. And the big puke is nowhere near done. Just wait.

Posted by: rat on July 14, 2008 at 10:41 PM | PERMALINK

Fair point, Kevin. The fact our economy can survive eight years of this fuck-up in charge DOES prove that it is very resilient!

Posted by: The Conservative Deflator on July 14, 2008 at 10:45 PM | PERMALINK

"And while we're on the subject, isn't it sort of amazing that we've seen the collapse within a few months of Bear Stearns, IndyMac, Freddie Mac, and Fannie Mae — and we aren't in even worse shape than we are?"

Or have we fallen out of a window on the 20th floor and only fallen 10 floors so far? Or 19?

Posted by: Jessica on July 15, 2008 at 1:10 AM | PERMALINK

Bear Stearns collapsed. Indy Mac collapsed. Agreed.

Fannie Mae and Freddie Mac have not collapsed. Not by a long shot.

Are there questions about their ability to meet their obligations if a certain percentage of their loans go bust? Sure. But that hasn't happened yet.

What happened is a lone analyst issued a negative analysis of F&F, and the Street's herd mentality, exacerbated by the current bear market in financial stocks, took over.

The moves by Treasury over the weekend are designed to bolster the market's confidence in F&F--not to actually bail them out.

There are, to be sure, important concerns about F&F. But it doesn't help to state as if they have indeed pulled an Indy Mac. They are a long way from that.

Posted by: Jim on July 15, 2008 at 11:18 PM | PERMALINK




 

 

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