Over the past few days, the news has been awash with word that the mortgage crisis has finally rammed the most insulated attic in the subprime house of cards. It seems that to observers of the economy, corporate bigwigs and regulators, the crumpling of Freddie Mac and Fannie Mae has been both disturbing and predictable.
The groundwork was laid years ago, according to the New York Times, with the gradual erosion of regulatory oversight.
Now, Fannie and Freddie are sitting atop a crisis that may amount to an estimated $1.6 trillion in losses. And Congress may soon step in to cushion the fall of the two mortgage-backing giants.
So for those of us who don't think of our finances in terms of trillions, what do Fannie and Freddie's money troubles mean for homeowners and taxpayers?
Some see the couple's woes as proof that an aggressive federal role in expanding homeownership has led to unsustainable optimism. Clive Crook at the Financial Times fears that in the long term, a major federal bailout would:
"surely shake financial markets, raise the government’s cost of funding and put heavy downward pressure on the dollar. Meanwhile, the turmoil impedes or paralyses the [government-sponsored enterprises] in their crucial life-support role for the housing market."
Seeing parallels with the Bear Sterns bailout, the Dr. Housing Bubble blog says a dramatic federal move to shore up the two giants would simply "shovel more toxic waste onto the government via Fannie Mae and Freddie Mac."
But Paul Krugman and other commentators have injected some liberal conscience into the debate. Krugman notes in today's column that Fannie and Freddie did not drive the subprime crisis (by definition, the loans they backed were not "subprime"). And while the feds will be tasked with a massive rescue mission, that's what the system is designed to do.
"...whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works. ..."Still, isn’t it shocking that taxpayers may end up having to rescue these institutions? Not really. We’re going through a major financial crisis — and such crises almost always end with some kind of taxpayer bailout for the banking system."
Paul Mason at the BBC takes a global, structural view of the promotion of freewheeling markets. Around the world, he says, "the state is becoming exposed to the debts and liabilities of the finance system" and "it's being done on the watch of governments committed to removing the state from the economy." He predicts a paradigm shift in financial policy:
"Soon somebody will argue that a state-backed finance system, with much heavier regulation, is better than the one the world's leaders have been trying to patch together at the G8 summit."
To Robert Waldmann at Angry Bear, the foreclosure knot that has ensnared the financial system should be a teachable moment for officials and corporate moguls:
"OK so we have to bail out the FM's. However, it is irritating that the people who made this mess obtained tens of millions in compensation doing so..."It seems simple to me (and many many others). The institutions are too big to fail, their officers are vulnerable to bad incentives. The correct policy is to keep the institution from failing in a way which will serve as a lesson to the officers of other institutions."
At TPM Cafe, Dean Baker of the Center for Economic and Policy Research wonders about the morality of bailouts in populist terms:
"We should all be thankful that the government intervened. After all really rich people and investment fund managers can't be expected to be able to handle their investments on their own. They need the helping hand of the government when they really screw up...."We could have told their shareholders that they are out of luck, because that is what is supposed to happen when you invest in a bankrupt company.
"Instead, we told the people who work as truck drivers, school teachers, and fire fighters that they will have to pay more in taxes to help some of the richest people in the country escape the consequences of their own stupidity."
Stay tuned for more from the editorial board on Freddie and Fannie's unfolding drama...
Comments (4)
It isn't lack of regulatory oversight that's the problem here; it is a lack of backbone. When groups approached these institutions claiming racism, they dropped the criteria for getting a loan rather than just tell the truth.... there are people who don't qualify for a loan because they can't afford to pay it back. Loans were not being made because of race; they were being made (or not made) based on financial criteria.
Now you've got a whole lot of people who are in a bad position, and who again will claim racism.... this time because they can't pay the loans and risk foreclosure.
Welcome to the new 'enlightened America'. A place where the tax payer will again be asked to step in and pick up the payments for people living over their heads.
It goes with saying that the "old" rules would have kept us out of this mess. No need for new improved rules. And I have to agree that it was the pressures to let all people (even those who couldn't or wouldn't ) pay back their loans enjoy the rising market. Just like the stock market/.com bubble... this was nothing more than the latest market churned to make the big boys richer... but this time WE'RE on the hook.... now it's the commodities market and oil....man the lifeboats folks.... this country is headed for the big fall.... Just remember.... Great nations and societies have risen and fallen for THOUSANDS of years on this planet.... and in the big picture.... the US is but a babe in the woods with 200+ years under it's belt...
Bush-Cheney MESS & CORRUPTION never ends.
This is the latest installment in their "Disaster for America" Plan.
BothF&F Mae pay their investors profits. But when they screw up, we the TAXPAYERS BAIL THEM OUT. When they have profits, they're capitalist; but when they're in trouble they're socialist!
What's up with THAT?
Can we taxpayers AFFORD to bail out for-profit companies when they begin to fail?
We pay taxes to government to CREATE ORDER & REGULATIONS to keep America and its economy safe.
The mess that's going on now if inexcusable, especially when it was predicted and there were warnings about it.
George and Dick have A LOT TO ANSWER FOR. When they leave the White House and the HUGE DEBT behind, they must be indicted to explain themselves and TAKE RESPONSIBILITY for their NEGLIGENCE and support ONLY for their profiteering pals of their NANNY STATE FOR THE RICH.
It's all about whose BOTTOM LINE got fattened during Bush-Cheney rule.
This is what happenbs when the government gets involved in things other than banking. These institutions were set up during the depression when the first great socialist of the United States, Franklin Delano Roosevelt, was President. The institutions were set up to provide loans to people that the private banks would not.
HELLO, does anyone see the real problem with that? The bank knew that this was a FAILED model. There was no way you could provide loans to people at this much risk and expect to not have problems.
This was stupid from the get go. Where in the constitution does it say that the government is supposed to set up institutions to provide loans to those that can't pay them or don't deserve them?
Keep this in mind all of you who want the government to take over health care, IT IS NOT THEIR JOB and they will do it extremely poorly!
Anyone else notice the huge problems we are going to have with Social Security? Guess which great socialist started that disaster! That is right, FDR, and now it will be insolvent in 20 - 30 years. It was a BAD model from day 1, but now everyone wants the government to do something to save it.
Not me, let it die. Make me a deal, I will not ask for any of the money back that I have already given to Social Security if they will STOP taking money out of my paychecks and I can invest it myself.
Also, to blame the current administration is just partison politics, this was doomed from day 1. Too often people don't want to just take their medicine. Let's not compound a problem by using tax payer money to bail out these institutions. Let them figure it out themselves.