« The best books with the worst titles | Main | Who wants cryonics? »
Parsing Paulson
Felix Salmon does the heavy lifting. Here's one tidbit from Felix's interpretation:
We can't afford for Fannie and Freddie to go bust, and we're Republicans, so there's no way we're going to nationalize them. And no one could conceivably afford to buy them. Which leaves only one option: somehow maintaining the status quo. Which is not going to be easy, seeing as how their trillions of dollars in assets are imploding daily in the biggest US housing crunch since the Great Depression.
Mark Thoma offers more links. James Hamilton likes the plan; I am not sure why though it is easy enough to see that many of the alternatives are worse. Paul Krugman says the share price collapse of the mortgage agencies may not be such a big deal. You also could read through the hundreds of comments at calculatedrisk.blogspot.com; they give a good sense of what people are thinking. Angry Bear wants to punish the CEOs.
The worst case scenario is that the market regards Paulson's statement as cheap talk and ups the ante sometime this week. I've yet to figure out what the best case scenario looks like.
Addendum: Here is an early MR post on Fannie Mae, read this one too.
Second addemdum: Arnold Kling makes many interesting points. Read Sebastian Mallaby too, who calls for "Nationalize -- and then dismantle." Here is my earlier post on the N Word.
Posted by Tyler Cowen on July 14, 2008 at 12:39 AM in Current Affairs | Permalink
Comments
Does this count as "people discussing the nationalization of banks?"
I know, I know, these aren't really banks.
Posted by: Mercutio.Mont at Jul 14, 2008 1:28:11 AM
Paul Krugman says the collapse of the mortgage agencies may not be such a big deal.
That's *not* what he is saying. Talking about deliberately misinterpreting your (ideological) opponents.
Posted by: JSK at Jul 14, 2008 3:55:30 AM
A few months ago I listened to an Inst of International Finance specialist talk about the hard times we are facing. Today's blog about FNM and FRE returned me to my earlier thought.
My teacher, Charles P Kindleberger, liked to quote a central banker friend of his: "The job of the Fed is to throw good money after bad until you make it good."
That's what they will do. 'Always darkest before the dawn,' etc. etc.
Thanks to MR for keeping us abreast even when I am away in faroff Abuja.
Posted by: william mcgreevey at Jul 14, 2008 4:43:45 AM
Indeed, JSK's right. How can the below be interpreted as not being a big deal:
"Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole."
Posted by: Tom at Jul 14, 2008 6:17:04 AM
More thoughtful analysis at http://billburnham.blogs.com/burnhamsbeat/ and http://www.econbrowser.com/archives/2008/07/the_fannie_and.html
Posted by: Foolish Jordan at Jul 14, 2008 7:29:44 AM
On Krugman I mean that for him the share price collapse is not the end of the world, not the possible bankruptcy or failure of the agencies. Krugman is clear on this and the link is there for all to read.
Posted by: Tyler Cowen at Jul 14, 2008 8:13:19 AM
At the end he says that Fannie and Freddie must not be allowed to fail, so your supposition that he claims it's not a big deal is incorrect.
He had it right up to that point. They should be allowed to fail, and if they don't of their own accord, they should be taken out back and shot Ceasceau style.
Posted by: Bill Stepp at Jul 14, 2008 8:18:49 AM
"And no one could conceivably afford to buy them."
As usual, economists in the United States have learned neither from the experiment with socialism nor from the transition back to capitalism.
Firms larger than Fannie and Freddie were privatized and sold off in countries much poorer than the US. Why should we expect not to be able to sell these?
At a bargain price they might be sold off or merged with existing corporations willing to undertake debt; but if not, several strategies were used to sell off large public firms in transition countries and they were used in part in order to do it as fast as possible. It would be be very simple to copy and make use of one of them.
Posted by: liberty at Jul 14, 2008 9:24:40 AM
One focus should be not to reward private capital (and the politically connected) and transfer loss to the public (via tax).
Short of "Nationalization" could be a federally funded reorganization through something called the MFRA (or any appropriate acronym).
Congress using its (unconstitutionally) arrogated authority would establish and fund the MFRA ( probably with far less than the presently proposed "housing bailout"). 20bn might be a good start, with MFRA then to buy a class of "control" preferred equity in each FNM and FRE for 10bn each, of which FNM and FRE would have to invest 80% in U.S obligations,and maintain as reserves in varying maturities (much like banks).
Under the conditions of the Preferred, it would receive a stipulated rate of return compounded and cumulative and no return would be paid on the present shares. The Preferred would have full and absolute voting rights on all matters until redeemed.
After taking control, FNM and FRE would be given the AT&T treatment and divided into several regional corporations, probably matching the Federal Reserve Districts, and the existing and new preferred equities would be re-constituted, with assets and liabilities matched as closely and equitably as possible to the areas of current activities and holdings. The MFRA would have bond issuing authority, subject to approval by Treasury, similar to other authorities, and U.S. backed. That would provide for market guided liquidity.
Shortly thereafter, a series of mergers of the resultant FRE and FNM spin offs would be devised. Then, those best managed would be set to survive, maintaining their tax and other advantages until the preferred is retired, from "earned surplus" produced from earnings in excess of servicing costs, including returns due on the Preferred.
Why not? Then each regional unit can bribe its own reps, and lower that cost of rent seeking.
Posted by: R. Richard Schweitzer at Jul 14, 2008 2:54:06 PM
To JSK, Tom and Bill Stepp, you are wrong and Tyler is right. Krugman said, and I quote: "the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it's already clear that that rescue will take place, their problems won't take down the economy."
So, it's you who are trying to misrepresent your ideological opponent, not Tyler.
Posted by: Patrick at Jul 14, 2008 10:02:42 PM
@Patrick:
Your loyality (to Tyler) is commendable, but obviously not inspired by the facts (or any close reading). How does 'the collapse of the agencies is not a big deal' (Krugman according to Cowen) equate to 'Fannie and Freddie probably will need a government rescue. But since it's already clear that that rescue will take place, their problems won't take down the economy' (Krugman according to Patrick)?
Krugman basically says that the agencies will be bailed out (they won't be allowed to collapse) and *therefore* their problems won't take down the economy. How do you see 'their collapse is not a big deal' there? Anyway, enough of this, it's getting a bit silly. But I recommend to the readers of this blog to do click on the links and not take any supposed Krugmanism (by Cowen) at face value. At least I will.
Posted by: JSK at Jul 15, 2008 6:43:23 AM
