Where Did the $110 Billion Go?

I hate to use the expression, ‘there ought to be a law’, but all governmental agencies are perversely incentivized when fees, fines and penalties flow back into the overseeing agencies. While it may not always be the case, at least sometimes the funds are able to be used above and beyond budgeted approvals.

“About $45 billion was earmarked for “consumer relief,” a category that includes money dedicated to helping borrowers…”

Presumably, this phrase means giving funds to borrowers so they could pay off their debts. Assuming this to be true, then some of the funds are just working their way back to the banks. It’s like debt forgiveness, but with extra steps.

While it may appear that those billions were extracted from banks and financial firms, they are in fact extracted from the public (in its economic activities) through banks and others as ultimate transaction costs.

Think about it.

In addition those firms have incurred enormous legal expenses; again in the billions, which costs will be passed through.

These kinds of transaction costs not only add nothing to production of goods or services for which there may be demands; they reduce available funding and distort distribution.

What they do is add to the autonomy of the powers of the Federal Administrative State; allowing those who make it up access to direct political powers as well. We are observing the beginnings of our second (and real, in terms of public impacts)government which is maturing into completely extra-constitutional form and purposes.

Anyone else notice the irony of this story coming out the same day as the Federal courts are scolding the Ferguson, MO government for doing the exact same thing? Using the court system to fund local government.

Here’s a piece Calomiris and Stephen Haber did for National Review which explains in detail how the activists collaborated with the banks to lower lending standards;

Activist groups soon came up with a way to solve this problem: They enlisted political allies in the House and Senate to force Fannie and Freddie to buy bank mortgages generated through CRA commitments. Senator Alan Dixon of Illinois convened a Senate Banking Committee hearing in 1991 and invited representatives from ACORN and other activist groups to testify — and they went after the underwriting standards of Fannie and Freddie with hammer and tongs. Consider the testimony of the Director of ACORN Housing: “It is ACORN’s observation that the underwriting criteria employed by Fannie Mae and Freddie Mac have been developed not for the general mortgage market, which includes low and moderate income homeowners, but for a middle income and substantially suburban mortgage market. As a result, it is our firm belief that the underwriting standards dictated by the secondary mortgage market are, at a minimum, income discriminatory and may, by extension, be racially discriminatory [emphasis added].”

The managers of Fannie and Freddie could see that they were being outmaneuvered, but they were not powerless, passive observers. In return for agreeing to lower their underwriting standards in order to purchase CRA commitment loans, they obtained the right to back their mortgage portfolios with paper-thin levels of capital, and to be regulated by an office within the Office of Housing and Urban Development (HUD) that had little power and no experience in financial-services regulation. In short, Fannie and Freddie agreed to go along with purchasing high-risk loans provided they could fund the expansion of their portfolios with borrowed money, and by virtue of Fannie and Freddie’s special charters as Government Sponsored Enterprises those debts were implicitly guaranteed by the U.S. treasury, which is to say by taxpayers.

Generally, all money received by federal agencies must be deposited with the Treasury Dept. This is to disincentivice bad behavior, but apparently Congress has provided a way for other uses.