Freddie Mac and Fannie Mae: Deadbeats

We're talking about doubling the federal deficit, and that's before the Boomers even get started retiring.

I think you mean to say doubling the federal debt.

Current debt: $9.5 trillion.
Current outstanding debt owned by Freddie Mac and Fannie Mae: $5 trillion.

Total debt if the Treasury has to assume those liabilities: $14.5 trillion.

Current GDP: $14 trillion.

The amount of debt held will be greater than the sum total of all economic activitiy in the US.

Weep and tremble.

I'm not sure they phrased all of that clearly. It would double the public debt for footing the bill for those two companies - a case of ambiguous antecedent for the term "public debt." I am not sure that it double the total public debt, or deficit. Maybe this is the case, but the article does not make it clear one way or the other.

I won't argue that it's bad news either way, just that the copy editor (if such persons are still employed at the newspaper that wrote this copy for the news agency) shouldn't have let this one go to the press without making the reporter re-write it. Accuracy and clarity are key.

From my reading I should note, there seems to be talk of issuing preferred shares to increase their capitalization. The government may be the holder or may gaurentee those preferred shares.

While I agree with you in theory Fish that the government backstops need to end...if F&F fall there will be essentially NO MORTGAGE LENDING in this country for the forseeable future. This is a huge deal, and if that happens, we may see another 1-2k fall off the DOW. Let's not forget that the gov't created F&F for the sole purpose of having a guaranteed mortgage backer in this country, specifically to aid low- and middle-income brackets.

The real issue we have to worry about is that what happens during the next administration if this takes place. Obama is making a lot of promises on entitlements right now (read: healthcare), and he is promising only to raise taxes on the upper-class to pay for them. I would imagine that if the gov't assumes the $5T debt on F&F, and Obama still pushes for the same entitlement plans, that there is no way we won't see a universal tax increase for all income brackets. On top of this, the Federal Reserve will probably manipulate the currency and we will borrow more from the Social Security and other countries to pay off the debt. If these things all happen, we could very well see an inflationary depression on top of reduced net income, which could result in economic chaos.

Why would the feds take on F&F in light of all this trouble? They can hide inflation and devaluing of the dollar, but they can't hide purchases and sales of homes. So my guess is they assume the debt, raise taxes on upper-income tax brackets, maybe raise taxes on middle-income brackets, and the Fed Res. manipulates the dollar for the other pet gov't projects.

Matt,

Point by point.

1) Maybe until the inevitable fire sale of assets (housing in this instance) occurs, no mortgage lending, as currently practiced, should occur? In desperation we are trying to shove an asset floor under overpriced homes to keep people from panicking. Maybe they should panic! Maybe they should feel pain!

2) I wouldn't worry too much about Obama going tax crazy. A universal tax increase in the face of a rapidly declining currency might lead to torches and pitchforks....the PTB know this. Remember Obama needs to make promises to get elected his ability to keep these promises will be out of his hands to a large degree. In truth, this is the only thing that gives me any real hope. We've dug ourselves in so deep that the ability of government to "fix" it will make things worse. This will likely lead to further distrust in government in general. This is a good thing!

3) You're probably going to see another 1 to 2 K fall off the DOW and get economic chaos regardless of anything done to save Fannie and her idiot brother Freddie. Wait till the backside of this hurricane hits (the adjustment of Alt-A paper. Subprime was a smaller overall loan pool and hit when economic conditions were better Alt A resets don't begin in earnest until next year. ) and the derivative mess hits.

By rescuing every entity that is "too big to fail" you guarantee that these events will happen. Every government sponsored entity the can't be allowed to fail is born to blackmail the guarantors!

Does anyone remember the original business model for lending? It gave its name to the last big scandal we had in this area: savings & loan.

I've had my money at a credit union for many years, and I'd never go back to a commercial bank for any reason. CUs have been lobbying for parity with commercial banks for a long time. I fervently hope they won't acquire the same diseases.

Oh, for the youngsters out there: the point of a savings & loan arrangement is the money customers deposit is the available pool of money for loans. Interest from loans goes to pay the lower interest owed on savings, the remainder is "profit" for operational costs etc. Current finances are much more complex than that, for sure, but I for one see a return to simplicity, not a complete collapse, possibly with CUs leading the way.

Ah, a sigh for the good old days...

Once I stopped just pulling the R lever and started looking more closely at real numbers and data, I noticed that our national debt has been going up when conservative Republicans were in the Oval Office. Cheney articulated what seems to be the official position on this issue.

This is an odd topic to choose for railing against Republican mismanagment. Fannie and Freddie have been pet projects of congressional Democrats for generations. In the DC area, key jobs at Fannie and Freddie are part of the revolving door process for Democratic political hacks as much as Pentagon contractors jobs are for GOP hacks.

If the Bush Administration bails them out, it certainly won't be doing anything different than any Democratic Administration would do.

How about no one's bothering to go after the companies that created these loans that these companies backed? The ones who illegally issued loans to people who couldn't afford them, and who fraudulent sold those loans to Fannie Mae and Freddie Mac?

Yeah, some of those companies are in trouble now, but a lot of them were just mortgage brokers and ended up holding none of these collapsing loans, and they're doing just fine and laughing as they roll in their ill-gotten gains.

Sue their ass. Take every penny, and more of those ill-gotten gains back. Remember that criminal misconduct allows piercing of the corporate veil...go after the executives also, and their fat payouts.

The FBI has reassigned over 200 agents to investigate mortgage fraud. Over 100 mortgage companies are bankrupt. FWIW, I'm aware of no law that makes issuing loans to people who can't afford them illegal other than some predatory lender laws. Being stupid isn't against the law. Setting someone else up as the bagholder if everything goes to hell isn't illegal either; most would call it prudent.

M.Z., this topic and your latest post reminds me of a comic strip called "There Oughta Be a Law"...

I was going to provide a weblink for the strip, but instead found further irony at And which came first, They'll Do It Every Time or There Oughta Be a Law? ;-D

This is very scary. You can't let Freddie Mac and Fannie Mae default on their debt. But that's a heck of a lot of money to bail them out.

What can we do to prevent this from happening again? You can put all these regulations into effect, but if you don't have honest people in the trenches, it doesn't matter. They'll find a way around the system. We as a country do not have enough people of integrity. Period. That's our problem and until we fix that, we're going to continue spiraling downward.

Why aren't more folks asking the obvious, namely, what is the government doing interfering so broadly in the supposedly free market to begin with? In a truly capitalist system, the mortgage and insurance markets would be completely private; instead, we have Fannie Mae and Freddie Mac holding or guaranteeing $5 trillion in debt. I know they are not legally backed by the government, but the implicit understanding seems to be that they would not be allowing to fail, on account of their sheer size.

Sure, this arrangement works 95% of the time, but in the perfect storm we're experiencing right now, it looks like we'll have to "socialize" the costs just to avoid financial Armageddon. Obviously, that'll mean adding to the budget deficit and national debt. Maybe, in the future, we should think twice about making the federal government the "lender of last resort." It obviously seems to encourage irresponsible investing and lending.

As for assigning the blame, it should probably be equally distributed between Democrats and Republicans. Democrats had the original idea for the two companies, but Republicans seem just as keen on preserving the "American dream." I understand that owning your own home helps social and familial stability, but we should not subordinate all our public policy to such a goal, especially if that encourages moral hazard.

I'm no expert, so I hope I'm not wrong about any facts or misusing any terms. In any case, it seems that we should definitely discuss the problematic nature of the government's involvement in the mortgage market.

We can thank FDR and his New Deal for creating this monster and thank Woodrow Wilson and the bankers who created the Fed in 1913. LBJ privatized Fannie in the 1960s because he wanted to move the debt off the Federal government's balance sheet (yes, Enron style). But I don't blame LBJ, he was making a good decision at the time. The real blame lies with the Federal Reserve, which the American people don't understand, and the New Deal, which the American people wanted. George Bush, Bill Clinton, Ronald Reagan, etc. are not responsible for the heavily regulated economy that exists today. The American people panicked during the Depression and never wanted to have another one, so the government insulated everyone from failure, blaming capitalism instead of the government created Federal Reserve which itself created a credit boom just like the one we have now. Airlines, railroads, steelmills, retirees, homeowners, bankers, automakers, even FDIC! Without failure, the imbalance in the system grows ever larger, until it finally reaches a tipping point.

All this talk of fraud, greed and cultural problems is missing the point. People behave this way because there is an incentive: the government takes the loss if you fail. Imagine the government put a big net under a bridge, and everybody started jumping off because it's fun. Eventually, too many people jump, the net breaks, and people die. Is the proper respone to attack the jumpers, or the government for putting up the net? Or go full socialist and say the problem is that we didn't have boats underneath to catch people in case they slipped through the net?

"Double the debt" of the US, yes.

But Fannie and Freddie ALSO have assets (the mortgages)--most of which are actually good.

So there's only a marginal NET increase in debt.

Clare Krishan Re: Ponzi Scheme economics
Don't despair folks, just yet!
Ron Paul's delegates are still attending the GOP convention, read his "Manifesto" and compare to those of his competitors (see YouTube v=_YqJICwtRTs)

Sorry? Did you say they don't have one? No published plans? What folly -- caveat emptor -- you're willing to elect someone with no clue what you're signing yourself up for? Ditch McCain, Obama will be toast, then perhaps (God willing) we'll have a return to sanity. Indeed Swedish bank SAXO predicted as much six months ago, see forums.hannity.com/showthread.php?t=460861

Why did we not pay them any mind?

Too ridiculous by far, right, Sean Hannity deemed it "stargazing on the wild side". He's such an eminence gris (tongue in cheek) aka blow hard that we all follow right along like so many sheep... Those who heed not the augurs of Liberty do so at their own peril... get with the program:

rEVOLution! Ron Paul 2008!

Meanwhile, readers can get educated on the real Ponzi in the economic mess, the legal fiction behind fractional reserve banking -- the sinking sands on which we have built our house of cards these past two centuries) -- this is NOT a modern problem: "Money, Bank Credit and Economic Cycles" at www.mises.org/books/desoto.pdf

All this talk of fraud, greed and cultural problems is missing the point. People behave this way because there is an incentive: the government takes the loss if you fail.

Careful, Other Jim! This is a Beliefnet combox. Logical reasoning is supposed to take a backseat here to denouncing abstract Evil-Doers.

"The prosperity of the 1980s is even more remarkable when you consider the environment it emerged out of -- the stagnant 1970s. "

Simon, I guess it was a case of regression to the mean.

Good one, Jillian! I find myself occasionally agreeing with you. I wonder which of us is getting smarter?

Simon, whatever you say. I know how it works. Take it from Phil Graham. If my life is rosy, the world's a rose garden where we wear rose colored glasses.

Right now for instance in Rawlins land I'm debt free and own my home outright...no mortgage... so this mess we're in has no immediate overriding repercussion relevance to me. Unlike the 5 people on my street whose houses were foreclosed (including one who is in the ‘National Guard’ in Iraq) Anyone out there in a panic, get a grip. You'll look back and see how lucky you were with that ARM mortgage and don't worry about your 401K. You're taking this all too personal!

I am certain that someone in 25 years will spin that the housing bubble mortgage sub-prime market is just Americans whining. Oh. Wait. Isn't that Phil Graham's point? It was really not a big deal. Just a blip and regional rather than national, yadayada.

I get the game. Forget the oil industry. Just a regional thing kid. Bankrupt businesses everywhere, fire sale auctions, real estate values tanked, etc. (Hint: don't try that one in GWB's hometown Midland). Never mind when I was on commission at Neiman Marcus selling $5000 a day and overnight it became maybe $5000 a week. (IF you were good and I was.) Let's not talk the Southwest. Let's talk how good it was up there in Dukakis land when Okla./Texas were on life support the last third of the 80s.
Got it.

Here's how political discussion works these days:

When anyone reality checks the Wall Street/ Junk Bond/Saving and Loan deregulated collapse 80s, the 21% interest rate Jimmy Carter 70s become the topic. When George W. Bush gets called into question, it's always about Bill Clinton. If there's an oil shortage, blame the dinosaurs that practiced birth control.
Gothcha.

rawlins,

The thread is about the problems at Fannie Mae and Freddie Mac, not Phil Gramm's views of the economy, which I don't even share.

YOU are the one who diverted us with comparisons to another era -- the 1980s, an era when economic conditions were radically different than they are today. And it so happens that your depiction of the 1980s economy is preposterously wrong.

Yes, as a matter of fact, the oil and gas slump WAS merely a regional problem in the 1980s. Overall, the U.S. economy boomed like it hadn't done in more than half a century, and the vast majority of Americans felt it. That's why not only Reagan won his landslide reelection, but even his lackluster Vice President coasted into Reagan's third term in 1988.