Monday, July 14, 2008



As loyal readers know, I have been writing about the credit crisis and the problems at Fannie and Freddie for a long time. (See, inter magna numera aliarum, the 8/31/07, 12/1/07, 1/17/08, and 1/25/08 postings on the Insightful Pontificator.) With the news this morning that the Treasury (or simply “Treasury,” as it has come to be called of late by the cognoscenti for some inexplicable reason.) will expand its line of credit to the housing agencies and might take an equity position in the “mortgage giants,” and that the Fed will lend directly to Fannie and Freddie (just in case they need it, which they won’t, we are assured, if only we can hornswoggle enough investors into backing a lame horse), reality has amazed even me. I thought that there was just a chance that I might be being too bearish when I postulated that the federal government would have to bail out Fannie and Freddie after Mr. Bush leaves the White House. It turns out that I was too bullish; the federal government (you and I) is bailing out these two beached leviathans while Mr. Bush is still in office. I am surprised; my critics must be absolutely dumbfounded.

As I have explained on numerous occasions, this is how the mortgage lending system works:

--People buy far more house than they need (or anyone needs, in many instances) and/or borrow against their newly acquired “financial asset” in order to buy diaphanous gimcracks.

--Gormless and/or facinorous Wall Street types pour copious quantities of perfume on these malodorous mortgages and sell the bastard children to other witless, fatuous Wall Street types.

--You, the taxpayer, who tries to exercise at least a modicum of restraint and good sense in your own personal financial affairs, wind up bailing out these financial players and “experts” through direct and indirect lines they are given into the treasury and through the decimation of the return on your savings that has resulted from the desperate efforts by Obsequious Ben Bernanke to bail out the Wall Street types he hopes will employ him at an astronomical salary when his tenure at the Fed is (mercifully) completed.

It’s the same old story: the responsible pay for the irresponsible.

Now I suppose that I am supposed to say something like “That having been said, Free Market Hank Paulson and Obsequious Ben Bernanke had no choice but to bail out Fannie and Freddie, after all…”

To which I say “Balderdash!”

There clearly is a choice here and the sensible choice is to let Fannie and Freddie go. Yes, I know that these mortgage monstrosities have liabilities, depending on how they are measured, $5 trillion to $8.8 trillion, and that those liabilities exceed those of the U.S. Treasury. And I know that these obligations carried the implicit guarantee of the U.S. government.

To which I say “Ya pays your money, ya takes your chances.”

People on Wall Street and/or in the money management business make astronomical amounts of money. They are paid such princely sums of spondulicks for work that should exceed merely looking at agency paper and saying “Hey, it’s agency paper. The government won’t let it default. Let’s back up the truck.” Some of this work might even involve (Perish the thought!) assessing counter-party risk. And one would think that, with all the “education” the world’s money management community is supposed to have had, its participants would be able to distinguish between the prefixes “ex” and “im” placed before “plicit” when the resulting adjective is used to modify the noun “guarantee.” Perhaps, if these “investors” were so keen on safety, they could have given up the (only a short time ago, it seems) few basis points they picked up going out of treasuries into agencies. But, no, they were yield hungry and, seemingly, satiated with their self-assurances regarding their own common sense and prudence.

Further, if “investors” take losses on their Freddie and Fannie exposure, three things are certain:

--the losses will not be total losses. They will get something, probably a rather large percentage of their investments

--the housing market will suffer, perhaps (but not definitely) severely. But so what? Markets adjust. When markets get way ahead of themselves, they must adjust. Yes, it will be painful, but it was awfully pleasurable on the way up and (wisely) no one counseled the government to step in with a little forced “real estatus interruptus.” Why is housing (and other forms of real estate) any different? Just because too many people are imprudently overinvested in it? Just because this country allocates what now appears (actually, has long appeared) to be an inordinate amount of capital to housing?

--people will be more careful when investing their, and other people’s, money.

On the other hand, if Fannie, Freddie, and every dissolute investment bank that comes down the pike are effectively guaranteed by you and me, several other things are certain

--Moral hazard will be the order of the day.

--There will be even less incentive for savings and other manifestations of financial prudence in this country.

--The inevitable correction will be worse than the one we would have experienced had our policymakers not been so eager to abandon what they insist are their free market principles, as in “I believe in the free market, but (when my friends are in trouble because they had no clue as to what they were doing)…”

--the Republic’s now seemingly inevitable trek toward its demise will be hastened. (Before you say what you want to say, remember, most of you thought I was being overly pessimistic when I predicted a Fannie/Freddie bailout.)

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