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Evaluating the Rescue of Fannie Mae and Freddie Mac

12 points by bpolania 11y ago

maxerickson 11y ago
The many legislative proposals to date all reflect the crosscurrents of trying to protect the taxpayer, preserve support for the thirty-year fixed-rate mortgage, and keep homeownership affordable to a wide spectrum of borrowers. It seems to me that making housing affordable is a better goal than making home ownership affordable. Any program targeted at home ownership should at least be benchmarked to actual ownership and not nominal debt based ownership. So for example, a policy that results in twice as many people taking out home mortgages but fewer people owning more than 50% of the equity in their homes isn't encouraging ownership, it's encouraging mortgage taking.
roymurdock 11y ago
The conservatorships have also strikingly failed in relation to our fifth and final objective of producing long-term mortgage finance reform. As Treasury Secretary Henry Paulson wrote, “We described conservatorship as essentially a ‘time out,’ or a temporary holding period, while the government decided how to restructure the [government-sponsored enterprises].” However, starting the conservatorships turned out to be easier than ending them, and the “time out” has now stretched beyond its seventh year with no clear path to reform. What did the government expect? It's not like Fannie and Freddie are going to ask to be released from conservatorship and re-assume the risk that they are currently sharing with taxpayers. TARP, QE, bailouts, nationalization, and government conservatorships were all designed with the aim of preserving the status quo and keeping the system running on pre-recession paradigms. None of the organizations that benefit are going to voluntarily relinquish access to these crutches. Releasing the two GSE's would be a great test to see if the Fed and government's plan for reform and economic stability has really been effective.
- lucozade 11y ago
  > None of the organizations that benefit are going to voluntarily relinquish access to these crutches Except of course that that's exactly what most of them did. By taking preferred stock the treasury gave the banks an incentive to buy back the shares and make the treasury a bit of money on the side. Much better than the UK government buying common stock and being stuck with it till they sell at a loss (as they're doing now). My understanding of the GSEs is that they're still haggling over precisely what form they ought to take in the brave new world i.e. it's not particularly that they want to be state run.
  - roymurdock 11y ago
    For the banks, the real crutch is the mental/precedence crutch of - buy back your equity and go back to running things as normal, and if the system fails we'll bail you out through nationalization yet again, so for now you can continue to operate under the taxpayer-shared-risk assumption. Using preferred stock was intelligent design in a micro level, but at a macro level the incentives and risk/reward profile constructed by the bailouts and liquidity injections is completely perverse.
mjpuser 11y ago
As a programmer, I think it's better to just "Let it crash". The reasons that they left are so high level, they are meaningless. This is a 10 paragraph article on an evaluation of the global economy. How was this published with any degree of sincerity?
- parasubvert 11y ago
  That presumes there are no consequences to "let it crash". A programmer for a respiration system software would not necessarily "let it crash", as this could kill someone. The same applies for institutions that back the global economy. Letting Freddie and Fannie crash meant that $5 trillion in mortgage-backed securities would evaporate. That would trigger a global depression on par with an asteroid crash or super volcano eruption. "The reasons that they left are so high level, they are meaningless." The article is pretty concrete as to its summary of the situation with the GSEs, and ended with a conclusion (with backing paper link) that they should be replaced by a private system. I'm not sure what more you'd want? "How was this published with any degree of sincerity?" I have the same question for your post. You come across as "I don't understand it, therefore it must be wrong/insincere". Could it be possible that they have an idea what they're doing, and you are not the target audience for this article?

12 points by bpolania 11y ago

The many legislative proposals to date all reflect the crosscurrents of trying to protect the taxpayer, preserve support for the thirty-year fixed-rate mortgage, and keep homeownership affordable to a wide spectrum of borrowers. It seems to me that making housing affordable is a better goal than making home ownership affordable. Any program targeted at home ownership should at least be benchmarked to actual ownership and not nominal debt based ownership. So for example, a policy that results in twice as many people taking out home mortgages but fewer people owning more than 50% of the equity in their homes isn't encouraging ownership, it's encouraging mortgage taking.

roymurdock 11y ago

The conservatorships have also strikingly failed in relation to our fifth and final objective of producing long-term mortgage finance reform. As Treasury Secretary Henry Paulson wrote, “We described conservatorship as essentially a ‘time out,’ or a temporary holding period, while the government decided how to restructure the [government-sponsored enterprises].” However, starting the conservatorships turned out to be easier than ending them, and the “time out” has now stretched beyond its seventh year with no clear path to reform. What did the government expect? It's not like Fannie and Freddie are going to ask to be released from conservatorship and re-assume the risk that they are currently sharing with taxpayers. TARP, QE, bailouts, nationalization, and government conservatorships were all designed with the aim of preserving the status quo and keeping the system running on pre-recession paradigms. None of the organizations that benefit are going to voluntarily relinquish access to these crutches. Releasing the two GSE's would be a great test to see if the Fed and government's plan for reform and economic stability has really been effective.

lucozade 11y ago
> None of the organizations that benefit are going to voluntarily relinquish access to these crutches Except of course that that's exactly what most of them did. By taking preferred stock the treasury gave the banks an incentive to buy back the shares and make the treasury a bit of money on the side. Much better than the UK government buying common stock and being stuck with it till they sell at a loss (as they're doing now). My understanding of the GSEs is that they're still haggling over precisely what form they ought to take in the brave new world i.e. it's not particularly that they want to be state run.
- roymurdock 11y ago
  For the banks, the real crutch is the mental/precedence crutch of - buy back your equity and go back to running things as normal, and if the system fails we'll bail you out through nationalization yet again, so for now you can continue to operate under the taxpayer-shared-risk assumption. Using preferred stock was intelligent design in a micro level, but at a macro level the incentives and risk/reward profile constructed by the bailouts and liquidity injections is completely perverse.

mjpuser 11y ago

As a programmer, I think it's better to just "Let it crash". The reasons that they left are so high level, they are meaningless. This is a 10 paragraph article on an evaluation of the global economy. How was this published with any degree of sincerity?

parasubvert 11y ago
That presumes there are no consequences to "let it crash". A programmer for a respiration system software would not necessarily "let it crash", as this could kill someone. The same applies for institutions that back the global economy. Letting Freddie and Fannie crash meant that $5 trillion in mortgage-backed securities would evaporate. That would trigger a global depression on par with an asteroid crash or super volcano eruption. "The reasons that they left are so high level, they are meaningless." The article is pretty concrete as to its summary of the situation with the GSEs, and ended with a conclusion (with backing paper link) that they should be replaced by a private system. I'm not sure what more you'd want? "How was this published with any degree of sincerity?" I have the same question for your post. You come across as "I don't understand it, therefore it must be wrong/insincere". Could it be possible that they have an idea what they're doing, and you are not the target audience for this article?