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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.
Posted by Tyler Cowen on September 7, 2008 at 07:40 PM in Current Affairs | Permalink
Comments
...how much school do you have to have before this seems like anything but a horrible idea? Does that naieve idea return in some grad schools, and not others?
Posted by: shawn at Sep 7, 2008 8:46:39 PM
"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."
Not surprising, considering that he fought a bunch of previous attempts to shrink or reform Fannie and Freddie. I have a difficult time seeing "strengthening the public mission" of the two as the right thing to do, though.
Posted by: John Thacker at Sep 7, 2008 8:58:23 PM
If Frank's and DeLong's statements represent the mainstream Democratic position, then Tyler may well ultimately rue his endorsement of this nationalization. Brad is saying that "the business of guaranteeing and packaging conforming mortgages is properly a public function". Frank is saying that the plan to slowly wind down GSE positions is just a "sop to the right" and won't really happen. Basically, the message is that, while the danger of imminent financial meltdown was a nice excuse, really this is the direction we want to go because mortgage default risk should be borne collectively.
Could someone who agrees with this please explain the logic of this ethics? I can understand how someone might believe that we should collectivize health risk, but mortgage default risk? Please connect the dots for me...
Posted by: David Wright at Sep 7, 2008 9:00:08 PM
I dunno but people keep talking about the existing senior debt and agencies. This is all about keeping the mortgage market going. That is, F&F continuing to buy and securitize "conforming" mortgages.
The alternative would be to let the existing entities run off and the losses fall where they may. And then coming up with a federal version of F&F (which they used to be). And fast, since the housing market would grind to a halt without the GSE's.
Posted by: ziggurat at Sep 7, 2008 9:02:32 PM
At least Barney Frank is being honest. The losses now become a line item in the federal budget, and that line item will increase as we now try to support home prices by subsidizing the buying.
Simply appalling. We are ruled by morons.
Posted by: Yancey Ward at Sep 7, 2008 9:11:46 PM
Ziggurat: Why do you think you have to have a guarantor to have a working mortgage market? Certainly, the US mortgage market in its current form depends on the GSEs, and would temporarily grind to a halt without them. But there are plenty of rich-world countries without either public or private guarantors where you can still get a mortgage. Hell, there are plenty of non-conformant mortgages in the US that get funded without a guarantor. Basically, banks would package mortgages as MBSs that do carry default risk. Homebuyers would have to pay slightly higher interest rates to get people buy those MBSs, but taxpayers would pay slightly lower taxes because they wouldn't have to cover other people's defaults. It's what happens in the jumbo market right now.
Posted by: David Wright at Sep 7, 2008 9:20:14 PM
All I can find opinions about are preferred shares. However, I am short common shares. Am I going to make out like a bandit here, or what?
Posted by: at Sep 7, 2008 9:47:50 PM
The sensible thing to do would be for the government to wind down these companies over a period of years, and allow new private entities without government guarantees to take their places. However, "sensible" and "government" are rarely found together in practice.
chsw
Posted by: chsw at Sep 7, 2008 10:26:32 PM
9:47:50 - Yes, you are.
chsw - The only reason the Common Stock is still going to be outstanding is so that the firms can Rape and Pillage, with privatized profits and socialised (i.e., paid by the rest of us) risk. So you're getting what you want. Stop whining.
Posted by: Ken Houghton at Sep 7, 2008 11:49:21 PM
All lobbying from the agencies has been eliminated.
Really? How?
Posted by: Tracy W at Sep 8, 2008 5:11:07 AM
" Certainly, the US mortgage market in its current form depends on the GSEs, and would temporarily grind to a halt without them. "
David: I agree in the intermediate term that they should disappear. However, this is the exact worst time to transition from a government guaranteed structure. I would like them to wind down over the next year or so. I just think that after F&F have become the primary market, pulling the plug could involve too much collateral damage for my taste.
Posted by: ziggurat at Sep 8, 2008 5:33:58 AM
The media will be relentless with their relentless attacks on Palin. I hope she can take it. Laura Ingraham said "you haven't seen anything yet".
BTW, would you like a Link Exchange with my Site COMMON CENTS?
http://www.commoncts.blogspot.com
Posted by: Steve at Sep 8, 2008 8:45:49 AM
This weird. The play-money prediction markets are placing a 14% chance on Fannie shares being under a dollar by innauguration day, while the real-money option markets place about a 100% chance on the same event.
Posted by: Person at Sep 8, 2008 10:45:15 AM
All lobbying from the agencies has been eliminated.
That's just hilarious. Nobody actually believes this, right?
Posted by: Methinks at Sep 8, 2008 6:04:57 PM
David Wright,
Isn't part of the problem that Fan and Fred began buying non-conforming mortgages, such as Alt-A, in 2006? By far, it is not the biggest problem with either. The deal was that they would be able to buy only the safest conforming mortgages and the regulator would be able to ensure that they did that and didn't cook their books. Ooops. Now, the deal is that they can keep doing what they were doing but by ensuring a market for their MBSs (by buying them), the Treasury has turned the MBSs into treasury securities (i.e. raised taxes to pay for homes that people couldn't afford to buy and which said people have no intention of paying for).
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