Because of the fnm/fre bubble many young people chose to become real estate agents & flippers instead of taking careers that add value to society like doctors, teachers, policemen, pornstars, etc.
If the government was smart they would cut their losses and completely privatize fannie and freddie, These GSE’s although they are very idealistic put the burden of risk on taxpayers when we have to bail them out while we don’t particpate in any of the gains. One could argue that because more people are able to afford houses and obtain loans because of these organizations that that is our benefit but these are the same people who cost others in society the extra tax burden. And with our ever increasing deficit it may be better to let them fail or let the real professionals buy their assets at fire sale prices and see how the markets handles it from here on out.
Completely privatize FNM and FRE? So the Treasury comes oout with a statement “We’ve thought about it and the best thing is for FNM and FRE to be completely private. We believe that their fundamental business of backstopping half the mortgages in the US is best done by a private company and that any good risk management should keep them solvent without US govt support. We know these are trying times but these guys will pull through”. (I think Congress would have to do this not Treasury, but I don’t really know). a) The stock goes to 0.05 in 12 secs. b) The credit market goes ballistic c) FNM and FRE take enormous losses on their portfolios (appropriate or not) and go bankrupt leaving some judge to sort out some terrible debacle. “If the govt was smart”? C’mon this kind of thing is exactly what the govt doesn’t want to do.
Anyone else notice that when JDV really wants to convince someone of his argument he always uses the term “c’mon”?
C’mon isn’t for convincing - it’s an expression of disbelief. There are all kinds of rational arguments about what should happen to Fannie and Freddie and how much the tax payer should bear some of which I agree with and some of which I don’t. The govt cutting their losses and abandoning them just isn’t one of them (though I hate paying for extravagant salaries for cheating a-hole executives at those places).
If we don’t bail out FRE/FNM we’ll have financial collapse, ballistic credit market, record unemployment, unhappy teenagers, smelly bathrooms, terrorism, lower same store sales, etc. I believe silly, irrational and illogical acts of congress are clearly justified when facing such a calamity. Just sign the bill Mr. President. Make my life easy for another month. Send me another stimulus.
“Send me another stimulus.” Are you being sarcastic or serious? I hope the former, because taxpayers are getting screwed by this stimulus program. Why? The treasury has to issue bonds to make the money available further deepening the fiscal budget deficit, which puts upward pressure on bond yields, which leads to higher borrowing costs from auto loans to mortgages. Who benefits from this? The f’n banks of course because the stimulus effects the long-end part of the curve the most, which results in a steepening of the curve, which makes the borrow short lend long trade even more profitable for the banks. This f’n stimulus check was made because there are stooges in Congress that believe that somehow out of the blue housing prices will stop falling and credit growth will continue at the same pace as it did prior to July07. Idiots. What a waste of tax payer money this crap was. Oh boy, lookie here my proud U.S. citizens, GDP grew 1.2% annually in 2Q due to our brilliant stimulus plan!!! But 3rd and 4th quarters are more likely to be flat to negative. LOL. And to get to the 1.2% GDP growth in 2Q, the PCE deflator came down 1.3% from the prior quarter. Got to love it. The only reason FNM and FRE will get bailed out because countries like China, Russia, and Korea made a threat that if FNM and FRE default, they will no longer support our current account deficit and the behemoth that it is. I think this will come to be, and the common will end up to be zero.
“Bail-out” means a whole bunch of different things. The kinds of solutions I think are reasonable are the kinds of plans that issue new equity, bag the subordinated credit, and stop the moral hazard of allowing them to take on excessive risk while providing them with gov’t backing. We don’t even have to do most of that yet. If the situation gets worse, we’ll deal with it then. The gov’t sending out stimulus checks was only connected to an agency bail-out in a spiritual kind of way. In fact, I think the govt really didn’t want people paying down their mortgages with the checks (which was, of course, a fine thing to do).
I understand your point JoeyDVivre but the bottom line is issuing new equity, and stopping the moral hazard of allowing them to take on excessive risk, are kind of in the opposite ball park. You either allow them to follow market forces or you make them completely public institutions with no shareholders, or the moral hazard will always be there. If we do things the way you suggest what stops the next congress from loosening their restrictions and creating the same mess we are in now. Don’t say people will learn their lesson because we all know in financial markets that people never learn their lessons.
wonder how this one is going to end. with 88% tax rates?.speak of moral hazard -democracy is one. http://www.cnsnews.com/public/content/article.aspx?RsrcID=33574
djpetway Wrote: ------------------------------------------------------- > I understand your point JoeyDVivre but the bottom > line is issuing new equity, and stopping the moral > hazard of allowing them to take on excessive risk, > are kind of in the opposite ball park. You either > allow them to follow market forces or you make > them completely public institutions with no > shareholders, or the moral hazard will always be > there. If we do things the way you suggest what > stops the next congress from loosening their > restrictions and creating the same mess we are in > now. Don’t say people will learn their lesson > because we all know in financial markets that > people never learn their lessons. First, by issuing new equity I was euphemistically talking about retiring the old equity. Paulsen’s statement that we like the current form of the company as a stockholder owned company seems like it is setting up an equity bailout which would really irk me. Next, my plan for the whole thing would be quite different. The capital guarantees are really important for the liquidity of mortgages but there are a couple of problems. When I was younger I worked for a couple of defense FFRDC’s (federally funded research and devlopment centers). The primary purpose of these places (despite all the rhetooric) is that defense needs talented people to do analysis but they need to pay them more than they can as military officers or civilian govt employees. Fannie and Freddie have a similar problem and you just can’t get a decent finance professional to take a G-11 salary. That means completely taking them over causes the organization to become even more mediocre than it is now. I think the right model is futures clearinghouses. I think agency debt defaulting and futures clearinghouses failing are approximately the same degree of credit risk. That means we get all the big banks standing behind the mortgages and that has approximately the same credit gurantee as the implicit govt guarantee of FNMA and FHLMC. Think of the confidence inspired by names like Bear Stearns, Lehmann Bros, etc…