Marginal Revolution

The median voter theorem

John A. Courson, chief operating officer of the Mortgage Bankers Association, a trade group, also pointed with relief to the statement by the Treasury secretary, Henry M. Paulson Jr. on Sunday morning that Fannie and Freddie would examine the fees they charge banks for loan securitization services, “with an eye toward mortgage affordability.”

Don't they...um..."need the money"?  And:

“The government doesn’t have a great deal of interest in foreclosing on a ton of homes,” said Kurt Eggert, a law professor at Chapman University in Orange, Calif., and a former member of the Federal Reserve Board’s Consumer Advisory Council.

And:

While it is not yet clear whether stockholders in Fannie Mae and Freddie Mac will be wiped out entirely, Mr. Paulson did say on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

That's some theorem.  Here is the article.

World's biggest bail-out: update

Arnold Kling wonders: what is the exit plan?  Brad DeLong and John Hempton think the Bush Administration showed some courage.  Brad thinks the preferred stock can do OK.  Here's what forced Paulson's hand.  All lobbying from the agencies has been eliminated.  WSJ reports: "House Financial Services Committee Chairman Barney Frank (D., Mass.) said in an interview that the near-term effects of the conservatorship will be to "strengthen the public mission of what they do" to prop up the housing market."  Preferred shareholders lose dividends.  CalculatedRisk has the clearest bottom line so far.

What if we didn't bail out the creditors?

"Could you clarify just how far on the hook I should be for someone else's frauds?"

That's MR commentator CK and the answer is "lots."  Here's more detail on the bail out, by the way.  Not good.

But let's say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

And I haven't even mentioned the credit default swaps market.  Well, I have now.

But for another point of view, try Jeff Rogers Hummel.

Conservatorship for the mortgage agencies

...the government would place the two companies under "conservatorship," a legal status akin to Chapter 11 bankruptcy. Their boards and chief executives would be fired and a government agency, the Federal Housing Finance Agency, would appoint new chief executives.

Instead of making a one-time cash infusion to keep the companies [the mortgage agencies] afloat, the government will make quarterly investments, to the degree that market conditions require. That way, in Treasury officials' view, investors can have confidence of a ready source of cash if the firms need it, but taxpayers need not be put on the hook anymore than necessary.

Here is the article.  Here is further analysis.  Here is Brad DeLong.  CalculatedRisk has lots and they note that the details on the status of the preferred stock -- held by many U.S. banks -- remain vague.

Overall it reminds me of how they treat misbehaving academic departments and I do not take that to be a good sign.  There is no expectation that things will get better soon.  The deal also seems to recognize that any one-off "solution" (e.g., a once-and-for-all recapitalization with a new and more senior class of stock) would recreate moral hazard problems and thus is unacceptable.  Or is it Paulson saying he is done and he wants either Obama or Palin to have to worry about this?  Or is this really about protecting the dollar rather than choosing the best institutional structure for the agencies?  I believe that at least forthcoming home buyers will be better off, as Congress will not want to look responsible for higher mortgage costs.

Addendum: Here are some of the details.  They are saying that preferred stock will take losses and that this won't hurt too many banks.  That would seem to represent the ascendancy of Paulson's view over the Fed.  Here is good commentary on that.

And Max says: "Here's the real bailout. Taxpayers will now directly support the housing market."  The coming series of events could end up as the biggest bailout in the history of the world.

What I've been reading

1. The Future of the Internet -- and How to Stop It, by Jonathan Zittrain.  The main claim is that everything will be sterile, tethered appliances.  The opening up of the iPhone would seem to bely this message plus competition usually works in giving consumers what they want.  A smart book (that is rare for internet books, oddly) but I suspect it will prove to be wrong.

2. Paul Auster, Man in the Dark.  Reviews for this work have a bimodal distribution.  I like most of Auster's books but I vote no.

3. The Gargoyle, by Andrew Davidson.  So far this is excellent junk reading.

4. Epilogue, by Anne Roiphe.  Ideally this book deserves its own post but it is difficult to excerpt.  It's about why the author, now a widow, finds it hard to fall in love again.  Definitely recommended.

5. The Boy with Two Belly Buttons, by Stephen Dubner.  It's a children's book.  I haven't read so many of these since Mr. Pines Paints a Purple House -- my favorite as a tot -- but to me it seemed very good.  Ages 4-8.

Big Mac Attack

No country with a McDonald's outlet, the theory contends, has ever gone to war with another....

Thomas Friedman, who invented the theory in 1996, said people in McDonald's countries "don't like to fight wars. They like to wait in line for burgers."...

The Russia-Georgia conflict has finally blown this theory out of the water.

From the Guardian.  Clearly the theory was over-identified.  Perhaps no two countries with Taco Bell's every go to war with one another.

Hat tip to Chris Blattman.