Bailed it Shall Be
By Arnold Kling
Officials said that after talking to senior lawmakers through the weekend, they expected that Congress would attach the proposals to a housing bill that could be completed and sent to the White House for approval as early as this week.
That means that no matter how badly the housing bill stinks, it will now be passed and signed quickly. It seems to me that it would make more sense to do the Freddie/Fannie bail separately, but obviously the Bush Administration is not strong enough politically to make that happen. When I last tuned in, the housing bill envisioned the FM’s standing as a bulwark for the housing industry, even paying a new form of tax to support “affordable housing.” Is that nonsense still in the bill? Probably.
James Hamilton found a different version of the Times story that says the plan would
give the government the authority to buy billions of dollars in stock in Fannie Mae and Freddie Mac
Now that sounds downright weird to me. It means that the government could be bidding up the price of shares, which does interesting things for shareholders and really interesting things for short-sellers.
I still would like to see lower capital requirements for banks to buy mortgage assets. Let them feed on the carcass of the FM’s. That would be a reverse of what happened in the 1980’s, when the FM’s fed on the carcass of the S&L industry.
Hamilton likes the bailout. I’m not sure I do, but I guess if the alternative is a total financial meltdown, you gotta approve it.
Over at Grasping Demagoguery with Both Hands, Brad DeLong writes,
Fannie’s and Freddie’s troubles make it more and more clear that the financial-market deregulation agenda of the late 1990s that Phil Gramm spearheaded was a more serious mistake than almost of any of us realized back at the time…
Let me give Professor DeLong an assignment. Find a list of all of the prominent calls for regulation of Freddie Mac and Fannie Mae over the last 15 years. Then write the name of the political party or the publication who called for that regulation on the blackboard. Do it 100 times. It will help your penmanship. It might even help your grasp on reality.
Instead, Congress gave the FM’s the regulatory arbitrage to get too big to bail. On top of that, it put them under pressure to “do their share for affordable housing” (translation: jump on the subprime bandwagon).
Suppose we fill in the blank to the following sentence:
Government intervention is the ____ for the recent housing crisis.
It seems to me, particularly if the FM’s are the biggest risk factor, then you have to fill in the blank with “cause” and not “solution.” But DeLong will be braying the opposite, and my guess is that the conventional wisdom will flock to his position.
they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.
That’s not the story that I was hearing from my friends at Freddie a couple of years ago. What I heard was that the market stopped producing investment-quality loans, and to stay relevant the FM’s had to buy into the junk loans. I have no first-hand knowledge, but I think it’s hard to explain all the losses that the FM’s are suffering if their borrowers were putting 20 percent down.