Fannie and Freddie

Two must reads on your new secondary mortgage business:

The Everyday Economist has a smart piece about Where Do We Go From Here (I have no idea whether he is a Buffy fan, but the line will get a couple of ThreeSourcers singing). His piece includes a link that exonerates Fan and Fred from the subprime imbroglio. I would personally blame these hybrid mutations for global warming and the lack of Oakland pass protection if I could, but Thomas Palley makes some good points as part of a larger picture.

The EE and I share concern over the Fed's larger role.

Perhaps more troubling is the development of new programs within the Federal Reserve to deal with this crisis. I have previously mentioned that the Fed has performed admirably in the face of the crisis, but this point needs to be better clarified. The Fed, contrary to its performance during the Great Depression, has been vigilant in its effort to serve as lender of last resort. However, as Allan Meltzer has pointed out, they have surpassed this goal and have actually become the “creditor of last resort.” This distinction is important because as lender of last resort, a central bank is an entity that serves to provide liquidity to the market whereas the creditor of last resort refers to a central bank that holds all of the bad debt that others are unwilling to hold.

He calls the Term Auction Facility a failure because it has not reduced risk spreads between LIBOR and OIS. I'm very concerned about the new Fed responsibility but would have to concede that I think it has contained their growth if it has not shrunk them. It's a smart read and I only had to look up two terms. Your mileage may vary.

It's ultimately a political problem long term as much as an economic problem short term. I suggested the other day that Senator Obama was committed to expanding public-private partnerships. Today, Senator McCain and Gov. Palin have a guest editorial in the WSJ.

The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions. Given the long-term mismanagement and flawed structure of these two companies, this was the only short-term alternative for ensuring that hard-working Americans have access to affordable mortgages during this difficult economic period.

We are strong advocates for the permanent reform of Fannie and Freddie. For years, Congress failed to act and it is deeply troubling that what we are now seeing is an exercise in crisis management rather than sound planning, and at great cost to taxpayers.

I like the high dudgeon, and I like the facets of the plan that Senator McCain claims credit for. I offer no comment on how legitimate his claims are, but he does pick out the good parts of Paulson's plan:

Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem. That plan reinforces the federal commitment to meet our obligations and get this mess behind us. It replaces management and board members. It requires that shareholders take losses first. It puts taxpayers first in line for any repayments. And it terminates future lobbying, which was one of the primary contributors to this great debacle. (Emphasis mine)

That said, the editorial does not offer a compelling, first-principles objection to Government Sponsored Enterprises (GSEs). I know looking for libertarian first-principles from Senator McCain is a losing proposition. But most of what he says is good; he just fails to wrap it up in a big philosophical ribbon. That makes it read like a stump speech.

UPDATE: Don't miss David Harsanyi's Risk for Thee but Not for Me

Rather, economy columnist James Pethokoukis of U.S. News & World Report, asks, "doesn't this make the case for privatization, and powerfully at that? Don't forget that we are also sitting here with Social Security and Medicare leaving taxpayers on the hook for more than $50 trillion in liabilities."

Isn't it ironic that government bars a citizen from risking his own Social Security funds because it's too chancy, yet it uses your money to bail out companies that have engaged in the very behavior government is supposedly safeguarding us from?

And really, what's more risky than letting Washington handle your money?

Economics and Markets Posted by jk at September 9, 2008 11:53 AM