Monday, July 28, 2008

More Thoughtful Commentary on the Fred/Fan Mess

Fannie and Freddie: Bail 'em out, then bust 'em up

Thoughtful well-crafted guest commentary in yesterday's Salt Lake Tribune, by the Heritage Foundation's J.D. Foster. Mr. Foster offers a proposed solution to the impending Fannie/Freddie bailout mess, and frames his opinion piece like this:

News that the Treasury is preparing plans to bail out housing finance giants Fannie Mae and Freddie Mac (FM2) has infuriated the American people. And rightly so: It's their money, after all, on the line. If they understood the whole truth, they'd be even angrier - but they should vent their fury at the guilty parties.
Foster then launches into a nice mid-article rant about entities which are deemed "too big to fail," and the all too obvious "seeds of trouble" (enormous size, inadequate capitalization, single industry focus, heavy political involvement) which were blindly ignored by the one governmental body which had the political power to have prevented the Fan/Fred problem from descending into its current crisis condition. Anger's OK, says Mr Foster, so long as it's properly directed:

Americans should direct their anger at Congress, which for years refused to heed the warnings, even as it worked to protect its gravy train of political contributions.
And finally Foster arrives at his proposed solution:

Anger isn't enough, however. As Congress readies a bloated housing bill, Americans should demand Congress ensure this kind of financial threat never looms again. Strengthening the federal regulator for FM2 is fine, but we really need to break these financial goliaths into many, much smaller and truly private companies. Unfortunately, there isn't time now to scheme the breakup of FM2 properly. Instead, Congress should separately task the General Accountability Office and the Federal Reserve with producing a study with its recommendations on how FM2 might be restructured into a variety of private, separate companies. Once cut down to size and properly regulated, these new companies would pose little risk in and of themselves, would never become too big to fail, and so would lose their implicit guarantee of a future bailout. It's not enough to call in the ambulance. We need to catch the mugger who perpetrated this crime-and make sure he never haunts the neighborhood again.
Not a bad editorial all in all; and definitely worth a read. This is the kind of mental exercise recommended to shake out the weekend cobwebs on a Monday morning, we think.

And what think our gentle readers about all this?

3 comments:

Curmudgeon said...

Thought a bit of the history of the mortgage rescue/bailout bill might be of interest. This is from a post this morning on DailyKos blogsite [link here.]

By the way, the procedural history of H.R. 3221 is fascinating. If you have no life, that is. Did you know that the bill started off as an energy bill, passed the House in August 2007, but never passed in the Senate? It later had most of its provisions shoehorned into H.R. 6 (the "Energy Independence and Security Act of 2007") which was passed in December of last year. That left the mostly hollowed-out shell of H.R. 3221 available for use as a housing bill.

Why do that? Because the original H.R. 3221 contained things like renewable energy tax credits, which means it was technically a tax bill, which the Constitution says must originate in the House. But the Senate had a package of housing provisions, among which were tax measures, but which couldn't be brought forth as an original bill in that chamber. With a bill in their hands that had been originated in and passed by the House that was a tax bill, they could add their provisions as amendments, removing all the energy-related stuff that had passed in H.R. 6, anyway.

And that's at least part of the story of how the " New Direction for Energy Independence, National Security, and Consumer Protection Act" became the "Renewable Energy and Energy Conservation Tax Act of 2007," which became the "Foreclosure Prevention Act of 2008" when the Senate amended it, and then became the "American Housing Rescue and Foreclosure Prevention Act of 2008" when the House amended the Senate's amendments.


And before anyone asks, yes, I am fully aware that this bit of legislative legerdemain and skullduggery was arranged by a Congress with a Democratic majority in both houses --- though with substantial across-the-aisle support.

Curmudgeon said...

The Bush Legacy:[Excerpt from the BBC, link here.]

The White House has lifted its deficit forecast for 2009 to $482bn (£242bn) up from $407bn.

The budget deficit measures how much more the government is spending than it is raising through taxes....

The forecast figure excludes about $80bn of war costs....

It is possible that the deficit for 2008 will also break the record of $413bn, which was set in 2004....

The deficit figure also is flattered by including the surpluses that are currently being accumulated by the social security trust fund, but that will soon turn into deficits in the next decade. And it takes no account of the potential costs of a full-scale Federal bail-out of the mortgage giants Fannie Mae and Freddie Mac, who have been given a Federal guarantee in the housing bill that has just passed Congress.

Fed Watcher said...

If the government were to act on this at all, it should have taken Fannie & Freddie into full receivership.

The present plan keeps these ridiculously inept G.E.S. companies running in "business as usual mode," paying giant salaries to inept corporate "leadership," paying dividends to shareholders who would be otherwise wiped out, and allowing Fannie and Freddie to keep lobbying US Senators and Congessmen to the tune of hundreds of millions.

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