4 ms·

Organizations like the Federal Reserve are incentivized to not look into their own role in producing financial instability. The GSE loan guarantee program is l

Organizations like the Federal Reserve are incentivized to not look into their own role in producing financial instability. The GSE loan guarantee program is largely backstopped by the Federal Reserve. It underwrites $6 trillion worth of US mortgages, which is approximately 50% of the entire market. In 1999, the GSEs set out to increase liquidity in so-called under-served residential mortgage markets, and thereby reduce the risk for private lenders to lend in that market, as this article describes: https://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html https://www.nytimes.com/1999/09/30/business/fannie-mae-eases... >>''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. >>'Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.'' In terms of the Fed's direct role, its actions in 2003 - 2005 largely followed the playbook prescribed by Fed mouthpiece, Paul Krugman in 2002: https://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html https://www.nytimes.com/1999/09/30/business/fannie-mae-eases... >>To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble. The market's natural behavior, which is to bankrupt irresponsible lenders, borrowers and speculators, seems to work in preventing bubbles from growing enough to cause financial instability. The collapse of Terra/Luna imposes more financial discipline in the crypto markets than any set of regulations could. Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard. This is the case with the Fed's role as the publicly funded lender of last resort, and the FDIC's role as publicly funded deposit insurer. With respect to the latter, here is a study drawing that conclusion: https://www.nber.org/papers/w22223 https://www.nber.org/papers/w22223

alisonkisk 4y ago
throwawaymaths 4y ago
> Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard. Can we put this in less technical jargon that describes what happens based on the structural system of how the feds actions make its way to economy as a whole? Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else, which most disproportionately hurts people on fixed incomes, and makes social welfare harder to provide by government and private charity alike.
- ETH_start 4y ago
  >>Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else, Yes. The short term stabilization brought about by the socialization of losses and due diligence costs also degrades the weeding out process that instills long term discipline on financial institutions.

alisonkisk 4y ago

throwawaymaths 4y ago

> Attempts to artificially reduce instability can often have the opposite effect, by socializing the harmful effects of irresponsible risk taking, and thus creating moral hazard. Can we put this in less technical jargon that describes what happens based on the structural system of how the feds actions make its way to economy as a whole? Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else, which most disproportionately hurts people on fixed incomes, and makes social welfare harder to provide by government and private charity alike.

ETH_start 4y ago
>>Attempts to reduce instability create stability for wealthy class, like wall Street and bankers, while socializing the cost of maintaining stability by increasing the cost of living for everyone else, Yes. The short term stabilization brought about by the socialization of losses and due diligence costs also degrades the weeding out process that instills long term discipline on financial institutions.