A Second Hand Conjecture

Continuing the discussion on tonight’s podcast, one of the recurring themes of much of the commentary on our current financial crisis is that the cause is too much deregulation. Possibly there is some truth to this, though the evidence is rather vague. The most disturbing figure in all this is Barney Frank.

“We need stricter standards on loans.”

Except, the problem here wasn’t lack of regulation, but that the regulations were not enforced, or fraud, by lenders, brokers and their clients. More laws doesn’t help. This was also a failure of long standing, not new. I would suggest simplifying and increased enforcement would be a better option.
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(photo: Ian Murchison | website)

The nationalization of Fannie & Freddie is often presented as a crisis of faith for the political right, due to its manifest incompatibility with the advertised belief in the “free market.” However, Sunder Katwala at NextLeft cleverly recognizes that it also presents a challenge to orthodoxy on the left, given that the insisted purpose of the nationalization isn’t government ownership, but to rescue businesses for a stable return to the private sector.

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Redstate
A good description of what just happened to Fannie Mae and Freddie Mac and some reasons why. This made me laugh. “If we were in China, they’d probably have “committed suicide” with bullets inexplicably entering the backs of their heads. I’d certainly want to shoot them if I were a shareholder of either GSE. There are some things the Chinese do better than we do.”

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McCain takes a stand against Washington’s biggest example of “crony capitalism:”

What should be done? We are stuck with the reality that they have grown so large that we must support Fannie Mae and Freddie Mac through the current rough spell. But if a dime of taxpayer money ends up being directly invested, the management and the board should immediately be replaced, multimillion dollar salaries should be cut, and bonuses and other compensation should be eliminated. They should cease all lobbying activities and drop all payments to outside lobbyists. And taxpayers should be first in line for any repayments.

Even with those terms, sticking Main Street Americans with Wall Street’s bill is a shame on Washington. If elected, I’ll continue my crusade for the right reform of the institutions: making them go away. I will get real regulation that limits their ability to borrow, shrinks their size until they are no longer a threat to our economy, and privatizes and eliminates their links to the government.

I only wish he had named names, like Barney Frank and Chris Dodd. For a more full description of who has been backing these guys, see here. Taxpayers first in line is right. Start by eliminating the dividend, and if future lenders are going to get a guarantee, past lenders should not get a penny from our largesse for them counting on us to bail them out. Too many people make loans under the theory of too big to fail. No lenders should escape injury for having done so. We have to eliminate the massive moral hazard of assumed government rescues of bondholders and lenders (see bear Stearns for exhibit A.)

We are quick to punish equity holders, but we repatedly rescue the holders of debt. That is doubly ridiculous in the midst of a credit crisis brought on by excessive risk taking in the debt markets. Only explicit government guarantees to lenders should be honored. Only after taxpayers are reimbursed should the lenders begin recieving their payments. Not one penny before that.

Of course, the loss to other lenders might make the current crisis worse, so I suggest they begin negotiating right now to avoid any need for our financing and to help keep these guys afloat. Cut the dividend, start shrinking the portfolio and shedding assets. Tell Congress to take a hike about expanding their lending activity, etc.  (Thanks to Instapundit.)

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One of the more entertaining howlers of contemporary liberalism, is the outraged caterwauling about “Crony Capitalism” and the Bush administration. Not because the charge isn’t true, it certainly is. No, the problem is when it comes to crony capitalism the Democratic party is where its at, and always has been. It is just that it is papered over with all kinds mushy feel good rhetoric.

Did any of these people pay attention to the the Clinton years? Not that Clinton was any kind of exception. Nowhere has that been more plain than in the case of Fannie and Freddie.

Want to know who has been enabling, profiting from, and carrying water for Freddie and Fannie? Paul Gigot gives us the whole story, including who really didn’t benefit, even before they became a budgetary anchor:

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie’s left-wing defenders are underwriters of crony capitalism, not affordable housing.

Who is one of the most vicious and self righteous defenders of Fannie and Freddie?

Trying to defend the mortgage giants, Paul Krugman of the New York Times recently wrote, “What you need to know here is that the right — the WSJ editorial page, Heritage, etc. — hates, hates, hates Fannie and Freddie. Why? Because they don’t want quasi-public entities competing with Angelo Mozilo.”

That’s a howler even by Mr. Krugman’s standards. Fannie Mae and Mr. Mozilo weren’t competitors; they were partners. Fannie helped to make Countrywide as profitable as it once was by buying its mortgages in bulk. Mr. Raines — following predecessor Jim Johnson — and Mr. Mozilo made each other rich. Which explains why Mr. Johnson could feel so comfortable asking Sen. Kent Conrad (D., N.D.) to discuss a sweetheart mortgage with Mr. Mozilo, and also explains the Mozilo-Raines tag team in 2003.

Read the whole thing. H/T: Coyote Blog

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Dwane Powell / Raleigh News and Observer (July 17, 2008)

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