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Fannie Mae Archive

Sunday

27

December 2009

1

COMMENTS

Fannie And Freddie Have A Very Merry Christmas

Written by , Posted in Economics & the Economy

The outrageous story of the week is Obama’s decision to try and sneak this by during Christmas:

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama’s current term.

Merry Christmas, and have a Happy New Year of watching government continue to do all the same idiotic meddling that destroyed our housing and financial markets.

Monday

7

December 2009

2

COMMENTS

Dispelling The “Capitalism Failed” Myth

Written by , Posted in Economics & the Economy, Government Meddling

This won’t be the first time the subject has been discussed on this blog, but the determination of many to paint last year’s financial implosion as a failure of capitalism requires diligence and constant restatement of the truth. The truth is exactly what Steven Horwitz and Peter Boettke bring in their new report, “The House that Uncle Same Built: The Untold Story of the Great Recession of 2008,” published by the Foundation for Economic Education.

From the introduction:

The theme of “The House that Uncle Sam Built: The Untold Story of the Great Recession of 2008” is that government policy, not a failure of free markets, caused the economic trauma we have been experiencing. We do not live in a free market. We live in a mixed economy. The mixture varies by industry. Technology is primarily free. Financial Services is primarily government. It is not surprising that the most government regulated and controlled segment of the economy, financial services, experienced the biggest problems. These problems were created by actions by the Federal Reserve combined with government housing policy (especially the government-sponsored enterprises – Freddie Mac and Fannie Mae). Misguided government interference in the market is the real culprit in laying the foundation for the Great Recession.

The entire essay is available as a pdf here.

Hat-tip: The Locker Room

Wednesday

18

February 2009

0

COMMENTS

Another Day, Another Irresponsible Bailout

Written by , Posted in Big Government

Obama Pledges $275 Billion to Cut Mortgage Payments

U.S. President Barack Obama pledged $275 billion to a program that includes cutting mortgage payments for as many as 9 million struggling homeowners and expanding the role of Fannie Mae and Freddie Mac in curbing foreclosures.

The plan includes $75 billion to reduce monthly payments for borrowers, helps homeowners with loans owned or backed by Fannie Mae and Freddie Mac to refinance at lower rates and promises incentives to industry. Obama will double to $200 billion funding available for Fannie and Freddie to buy loans.

Let’s break down the genius of this plan:

Reward speculators who thought house prices would never drop? – Check

Reward banks that made bad loans? – Check

Reward irresponsible borrowers who falsified loan applications and lied about assets, or just otherwise recklessly took on obligations they could not afford? – Check

Further intensify the problems of moral hazard and undermine the foundations of a responsible capitalist society? – Check

Leave to the next generation yet another bill to pay for the baby-boomer’s irresponsibility? – Check

Blame everyone and everything except for the government policies and failures actually responsible? – Check check check check check

Tuesday

9

December 2008

0

COMMENTS

Politicians Still To Blame

Written by , Posted in Economics & the Economy

The WaPo brings us this shocker: Fannie and Freddie execs knew of risks in their behavior!

In a memo to former Freddie chief executive Richard F. Syron and other top executives, former Freddie chief enterprise risk officer David Andrukonis wrote that the company was buying mortgages that appear “to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed.”

…The documents, which the committee has not yet released but were obtained by The Washington Post, show that Fannie and Freddie, two linchpins of the nation’s mortgage market, continued to push into new, risky markets despite internal debate over whether the efforts were prudent.

…Fannie and Freddie’s distress has its roots in the new, risky mortgages the companies bought and guaranteed in increasing numbers, largely from 2004 through 2007. These new products included home loans made to people with blemished credit histories, called subprime loans, and mortgages made without verification of income, assets or employment, often called Alt-A.

As Mudd’s and Syron’s decisions have been called into question, they have described their push into these new areas of the mortgage business as an inevitable consequence of dueling mandates to support affordable housing and maximize profit for shareholders. And they’ve said that the collapse of the housing market was unforeseeable and the primary reason behind the company’s fall.

But the documents show how top executives at both companies were told that the new subprime and Alt-A loans were dangerous both to the companies and to the borrowers they were charted by Congress to help.

This article would have us believe that, because subprime loans harm low-income borrowers (they often do), and government was claiming to help low income borrowers, that it can’t be the government’s fault that these loans were given recklessly.  After all, they were told to help these people!  Well, not quite.  This argument displays an ignorance of simple political reality: what the government claims it wants and what it actually wants are often two different things.

Politicians can claim they wanted to help low-income borrowers all they want, but what they really sought to do was to LOOK LIKE they were helping low-income borrowers.  They were, in essence, pandering.  Emotionally, it’s easy to claim that securing loans for low-income borrowers was to their benefit, and that’s exactly what politicians did.  They even demagogued those responsible enough to try and stand in their way.  So Fannie and Freddie knew what the political fallout would be if they didn’t continue to pursue reckless, subprime mortgages. They also knew *wink, wink* that the taxpayers would be there to bail them out if they went under.  Is it any wonder they chose to ignore these warnings?

The government role in the operation of Fannie and Freddie, no matter how much big government cheerleaders try to deny it, is unquestionably responsible for their collapse.

Wednesday

24

September 2008

5

COMMENTS

What Really Happened In The Financial Market

Written by , Posted in Free Markets, Liberty & Limited Government, Waste & Government Reform

The False Explanation

You’re going to hear a lot of stories in the coming days, and probably have heard a few already. Following the high profile collapse of the giants in the financial sector, there are going to be a number of groups jumping to advance their agenda by telling you falsehoods about who is to blame. Socialists, statists, anti-capitalists and all manner of other market and freedom haters are already jumping to lay blame at the feet of capitalism. Yet many of these people have themselves played a part in this mess. The Obama campaign is already out to make “deregulation” a dirty word, and has released an ad making two false claims: first, that deregulation had anything to do with the financial crises and, second, that allowing competition in health care would create a similar situation. Even the New York Times, criticizing the ad for its falsehoods, acknowledged that “[deregulatory changes] were viewed by many as having benefited consumers by encouraging competition, and those changes have not been linked to the current crisis.” But in order to advance the socialist regulatory agenda, it is constantly necessary to demonize the free market.

The most hypocritical market-basher, by far, is long-time Democratic Party embarrassment Barney Frank. Frank has been making the rounds dispensing his distorted account of what has happened. For instance, he attributed AIG’s troubles to “lack of regulation,” and self-righteously declared, “the private market screwed itself up and they need the government to come help them unscrew it.” On the overall financial meltdown he says, “Some private-sector people made irresponsible decisions because there wasn’t adequate regulation.” Not quite. There was inadequate regulation, but of government, not the private-sector. It is government policy and government sponsored entities Fannie Mae and Freddie Mac that are the drivers of this meltdown. And when it came to regulating their behavior, Barney Frank was a chief roadblock.

Freddie and Fannie became a half-way house for democrats heading out of government.

In 2003 President Bush attempted to address the problem created by Fannie and Freddie’s insulation from market incentives. The President proposed an agency to oversee the quasi-governmental companies. Democrats, bought and paid for by F&F, were strongly opposed.

Granted, I would have preferred that President Bush had chosen market incentives over regulation by cutting Fannie and Freddie loose from government altogether. But, and this is a big but, if government is going to insist on socializing risk, it’s better that it also provide even a crude form of accountability (and crude is all the accountability government can muster compared to markets), to make up for it. Leaving F&F roaming free as part-private and part-governmental, with the dueling and often contradictory missions it implies, without either market or government forms of accountability, was the worst possible solution. It’s also the one Barney Frank demanded when he opposed Bush’s effort and declared that, “[Fannie and Freddie] are not facing any kind of financial crisis,” before also concluding, “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” And that is exactly what led us to this mess: the government’s reckless demands for “affordable housing.”

A Government Created Mess

In 1977 a Democratic Congress, working with a Democratic President, produced the Community Reinvestment Act (CRA). The CRA forced banks to make unsound loans to poor, uncreditworthy borrowers, all in the name of liberal fairness. Required to keep extensive records of their minority lending practices, banks became targets of racial shakedown artists. If they weren’t satisfied with a bank’s submission to their extortionist demands, they could have them denied the right to expand or merge with other banks.

In 1994 Clinton revamped the CRA and kicked off a new wave of reckless lending. This is where Freddie and Fannie jumped in to corner the market on bad loans, loans which wouldn’t have ever been made if rules requiring money down and sufficient sources of income hadn’t been thrown out the window in the name of racial equality.

Another contributing government factor was the loose monetary policy pursued by the Fed. By keeping interest rates too low, the Fed contributed to an influx of dollars into the market. When money is created faster than productivity warrants, it results in a misallocation of resources in certain assets, creating “booms.” Former vice president and economic advisor at the Federal Reserve Bank in Dallas, Gerald P. O’Driscoll Jr., blames the Fed for not properly weighing the costs of their inflation targeting methods:

In a vibrant market economy with technological innovation and ever new profit opportunities, the monetary policy that maintains price stability in consumer goods (or zero price inflation) requires substantial monetary stimulus. That stimulus will have a number of real consequences, including asset bubbles. These asset bubbles have real costs and involve misallocations of capital. For example, by the peak of the tech and telecom boom in March 2000, too much capital had been invested in high-tech companies and too little in “old economy firms.” Too much fiber optic cable and too few miles of railroad track were laid.

The Democrats’ Revolving Door

While government policy was meddling with the financial markets, government officials made themselves quite comfortable in the financial sector. Freddie and Fannie became a half-way house for democrats heading out of government. Franklin Raines, currently Barack Obama’s financial advisor and former Clinton era budget director, spearheaded Fannie Mae into countless Enron-style accounting manipulations and scandals. Foreshadowing the left’s current strategy to peg their failures on advocates of free markets, Raines derided those who pointed out his companies risky and shady practices as “ideologues” trying to “undermine” Fannie Mae.

Jim Johnson, also a former Fannie CEO and a board member of Goldman Sachs, is a policy advisor who was chosen by Obama to lead his vice-presidential selection team. Johnson was forced to fall on his sword when it was revealed he and several other prominent democrats received special perk loans from Countrywide Financial’s CEO Angelo Mozilo. With no banking or financial experience whatsoever, Jamie Gorelick, former Deputy Attorney General under Clinton, was appointed Vice Chairman of Fannie Mae in 1997, and got fat off of Raines’ accounting scandals. Rahm Emanual, the 4th highest ranking democrat in the House, was similarly shuffled onto Freddie’s board after leaving the Clinton White House.

Meanwhile, their Democratic colleagues who remained in government were assured their part of the take. Chris Dodd, now Chairman of the Senate Banking Committee, raked in the most from Freddie and Fannie, at $165,000. Perhaps these donations are what Dodd had in mind when, in July, he referred to Fannie and Freddie as “fundamentally sound and strong.” Number 2 on the graft list is Barack Obama, who took in over $125,000 in his short tenure in the Senate. The government’s pet mortgage lenders further feathered their nests by opening “partnership offices” in the district of key members of Congress, where they could funnel millions of dollars to their supporters. The bribes paid off. Compared to IndyMac, which didn’t offer democrats any protection money and was thrown to the wolves by Chuck Schumer, Fannie and Freddie are now looking at billions in taxpayer support.

It’s not hard to see why, when President Bush sought to counter Fannie and Freddie’s government created incentives for recklessness, he was fought by Democrats at every turn. According to the White House, 17 attempts at reform were blocked by democrats. Government’s inability, thanks to Democratic cronyism, to replace the market checks which it destroyed by demanding reckless behavior on the one hand, and subsidizing risk with an implied guarantee on the other, provided the perfect financial storm for disaster.

One would think it would be difficult for those on the left to so easily absolve themselves of any responsibility, while simultaneously blaming those who attempted to stop them from creating this disaster, but that is exactly what they’ve done. Phil Gramm, who sought to relax the Democratic created requirements that banks issue risky subprime loans, has been tagged a “deregulator,” which is, in their view, automatic proof of guilt. Barack Obama blames the problem, as he does everything, on “Bush-McCain,” even as he found room in his campaign for those actually responsible and belongs to a party which protected Fannie and Freddie from reform. In short, the left is trying to rewrite history even as it’s being made. The ink hasn’t yet dried on the reporting of their government sponsored mess, and already they are blaming those who believe in freedom and oppose their interventionist programs. They think the failures of government should justify yet more government. They are wrong and their lies shouldn’t be allowed to disguise this fact.