I guess even the Bush administration doesn’t want Fannie Mae and Freddy Mac, the two giants of the mortgage industry in the US to fail, at least not on Mr. Legacy President’s watch. Naturally, just as with the Bear Stearns bailout, they announced the rescue plan on a Sunday:
Alarmed by the sharply eroding confidence in the nation’s two largest mortgage finance companies, the Bush administration on Sunday asked Congress to approve a sweeping rescue package that would give officials the power to inject billions of federal dollars into the beleaguered companies through investments and loans.
In a separate announcement, the Federal Reserve said it would make one of its short-term lending programs available to the two companies, Fannie Mae and Freddie Mac. The Fed said that it had made its decision “to promote the availability of home mortgage credit during a period of stress in financial markets.”
An official said that the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion. […]
The officials said they were prompted to act because, despite repeated assurances by top officials that the companies had adequate cash to weather the current financial storm, Fannie and Freddie suffered a withering blow of confidence last week when their stocks plummeted on the New York Stock Exchange. As a result, Freddie faced an uncertain debt offering on Monday.
The companies, known as government-sponsored enterprises, or G.S.E.’s, touch nearly half of the nation’s mortgages by either owning or guaranteeing them, and the debt securities they issue to finance their operations are widely owned by foreign governments, pension funds, mutual funds, big companies and other large institutional investors.
Three Hundred Billion Dollars for just two companies. Even in the age of Bush the Lesser, that isn’t chump change. To give you some idea of the magnitude of the situation, the entire savings and loan bailout in the late 80’s and 90’s in which over 700 failed savings and loan institutions were “resolved” by the federal government cost less than 200 billion dollars. Even with adjustments for inflation and the devaluation of the dollar, it’s staggering to think that the estimate (and I doubt anyone can reliably predict the actual cost) to save Freddie and Fannie from insolvency is comparable to the entire cost of the savings and loan crisis. That cost was spread out over a decade. The rescue of Fannie Mae and Freddie Mac is likely to be incurred over a much shorter time, and during a period of great financial instability.
Of course, they aren’t the only financial institutions likely to fail over the next few months. We could be looking at a collapse of banks and other financial companies the likes of which we have not seen since the 30’s during the Great Depression. Should war with Iran or other calamity occur causing crude oil prices to skyrocket, this catastrophe would spread to engulf the entire world’s economy.
Like dominoes, the first few that fall are harbingers of all the rest to come. And we live in a world of economic interconnectedness far in excess of that which existed in the early 20th Century. Other countries are heavily invested in our debt, hold vast amounts of our dollars in reserves and depend on our markets to fuel their economic growth. Trust me, there will be more falling dominoes in the Grand Unified Globalized Economy. You can count on it. The only question is how many will fall.
This will not be sorted out by Jan. 20. It could give President Obama an historic opportunity to dramatically expand public housing at historically low prices, should he choose to do so.
Well, that’s a lot of dreaming. Not one major politician in my memory back to the 70’s has taken on housing as a policy much less a populist stance on public housing.
“Free” Market capitalism is the rule, and we’re going to be getting more and more of it here, with it’s onerous, amoral destruction of social services, promotion of business for the top 1%, and rape of the 99% for profits.
Stop thinking Obama is some kind of progressive. He’s a Centrist, he’s NOT going to make any progressive changes. He’s exactly the same as Hillary Clinton in terms of policy and voting, so expect NOTHING but a few reversals of minor civil liberties violations created under Bush. Geesh, Obama voted FOR the FISA legislation! He couldn’t even give us that! And you have expectations that he, “should he choose to do so” will create affordable housing?
Never.
You guys are both missing the boat. It’s indicative of the failure of Democrats to discuss economic issues the last 20 years that you both think the “progressive” response to this crisis is to create more government housing programs. This is a foolish. This is what caused the problem in the first place. So don’t worry–Obama will do what you want. He will call (and has already called) for more government meddling in housing prices. Obama will demagogue the issue, like the other Democrats. He will claim to be helping the little guy and will actually primarily be helping the big boys on Wall Street. The Republicans will claim to be helping the whole economy (“too big to fail”) while primarily helping the big boys on Wall Street. Massive government intervention in housing is what caused the problem in the first place and is exactly the wrong policy. We are screwed.
And most mainstream politicians, both Dem and Republican, are for these bailouts. The bailouts are a terrible idea and not in the publics interest but the public has been so confused about economic matters the last 20 years because both parties have become stooges for Wall Street. It’s not “free” market capitalism. It’s the opposite. And Paulson and the Fed and the entire government (both Dem and Republican) are pining for government bailouts. It’s disgusting. It’s short-sighted. It’s doomed to fail.
The answer, my friends, is joining with libertarians. As with civil liberties, those of us on the left side of the political spectrum should join forces with libertarians to fight against government bailouts for Wall Street. The Dems aren’t on our side on this. They will do just what the GOP wants to do–bail out Wall Street no matter how reckless they were. The only difference is Obama and the Dems will throw the middle class a bone (mostly rhetorically) to make it seem like they care about the little guy.
you gave me a tickle…speaking as if you’re not a taxpayer!
Blame the Democrats – tax and spenders! Huh?
How about the GOP and Bush during the last seven years with laissez faire (hands off) policies – the market will take care of things as trillions were added to the debt. And with no oversight, Bush and cronies allowed Fannie and Freddie to create OTC derivatives knowing fully well there was an implicit government guarantee to these two entities.
But no oversight, in the wake of the Iraq war, we had to put on a feel good show on Wall Street – create billions out of thin air – feel good go out and spend, buy houses, keep the economy ‘looking’ strong. Smoke and mirrors.
Guess what the $596 trillion dollars of OTC derivatives are coming home to roost.
The damage from Fannie and Freddie is expected to cost taxpayers $1.2 trillion and that’s a low figure.
We’ll just hyper-inflate our way out of debt because there’s no practical solution. In the last seven years we’ve contributed to the destruction of the dollar.
Join Civil Libertarians? unless you want to crawl under the nearest rock because the global economy is addicted to debt.
Welcome to the Mugabe Club. Jan 2011. Mark that down.
This sounds confused. I don’t really know what your point is. My economic beliefs don’t fit neatly into the “libertarian” mold and I don’t advocate complete economic libertarianism that one would see people like Ron Paul advocating. I am simply arguing that liberals should join forces with libertarians and adopt some of their policies. I personally believe in limited government but the government we have should provide a basic social net. Health care should be provided to everyone. Basic SHELTER and food should be provided to those that need it. Note, I’m not talking about the current system that provides government price supports for housing through mortgage interest deductions and support for GSEs and the Fed’s easy money policy that led to the housing bubble. I’m talking about a basic social net but letting the markets function naturally. And naturally the shareholders and bondholders of Fannie and Freddie should be wiped out. That’s capitalism–which is good.
Progressives and liberals need to get back to the basic economic principles that drove them 50 years ago. They should support social security. They should make the tax code more fair and progressive. They should support worker rights and unions. They should support fairness in bankruptcy. They should demand companies honor their commitment to their workers via their pensions. And most importantly, they need to stop the complete takeover by big corporations of our political process. To me this is progressivism. But the other lesson is that free and fair market capitalism works.
And on housing government intervention will hurt rather than help the middle class. Houses are overpriced because the government has helped encourage a bubble. Letting the bubble pop is the best medicine for going forward. That way homes will be affordable to more people more quickly.
Anyway, I find that my basic “progressive” economic views are more closely aligned with libertarians than with either of the major parties. Republicans are slightly worse than the Democrats on economic matters. But there really isn’t much difference. The main difference is rhetorical and around the edges.
And I don’t know what you’re talking about when you accuse me of not caring about the debt we taxpayers are about to take on. I am a taxpayer and I don’t want the GOP-led executive branch and the DEM congressional branch to cost the taxpayers 1.2 Billion. But the only people objecting to this are the LIBERTARIANS and some liberals (although a lot of liberals seem to be saying that bailouts are fine as long as they are geared to individuals). The shareholders and the bondholders took the risk and they should be allowed to fail. The Dems are joining the Republicans by bailing out their corporate overlords. Look at Dodd and Frank. They are not “progressive” on economic issues.
And you’re right that the failure to regulate derivatives and the securitization of mortgages and other debt has led to problems. As well as other lax accounting regulations. Clearly, the Dems and the Republicans failed when they adopted the laissez-faire policies that led to our current financial system.
I diverge from extreme libertarians in that I think some regulation is good. Regulating banks and other institutions and markets is needed to make markets fair. I just don’t think outright intervention in the market (to prop up housing markets–or to provide a backstop to certain failed corporations, e.g. Bear, Fannie) is always a good thing.
The commercial stuff hasn’t even hit the radar screen yet and as for the bank portion, CNN noted this morning wasn’t even on the 90 bank watch list as late as last week and that the list may in reality be as large as 150-300 banks.
Hard not to recognize that we are tipping into a nationalization of these banking systems and it is hard to imagine how that can ever be taken back for a semi-private sector. For the team of Phil Gramm’s that have brought this to our heartland, you are worse than the version of ‘traitor’ that our MSM bandies about.
With the dominance of the Neo-Classical economic paradigm it is likely that the only thing that will be “nationalized” is the retirement savings of US citizens. Those rash enough to have Freddie or Fanny stock or bonds may see their value massively diluted, but for the US taxpayer to have any possibility of recouping anything from this debacle, the injection of “liquidity” into Freddie and Fannie would have to be in return for equity. What heresy!
Something to think about
Thanks for the link. This is an example of the consequences of “socialization of risk.” My concern is that the “shock capitalism” folks will figure out ways to get even more “value” out of this before most wake up, if they indeed are even still capable of arousal.
Any bets on what the commercial review will open our eyes to?
It feels like 1988 all over again. I was 18, and in RI we’d just elected Bruce Sundlun as governor. Practically the first thing he did was shut down all the banks while the S&L crisis got sorted out. No one could get any of their money out of the banks!
Meanwhile, his predecessor Ed DiPrete slipped out of the state. I think he was later arrested and is serving time.
The S & L crisis was a drop in the ocean compared to what we are faced with today. And it arose from the same cancerous policy of deregulation that has been allowed to occur by both parties.
oh yeah, I know. I should have added “but exponentially worse” to my original comment.
Confirmation of the concern that the big boys intend to recoup from this debacle whatever they can out of our hides can be found here.
good link. It occurs to be that we overlook the huge portion of our wall street investors who are foreign and just what will happen if they start a sell off.
Yeah, China, for instance, holds a significant percentage of all US T-bills. Given the size of their position, there is no way to exit without destroying the value of their holdings and the value of the US$. Probably, what we are seeing is the people who brought us this debacle trying to get out with what they can, with Helicopter Ben providing air cover for the get away and Barney Frank and the other dems helping to carry out the money, hoping to make it quick before anyone notices. They probably will succeed.
I will be very pleasantly surprised if the MSM give any real coverage to this. Their blather will all be about how we are saving the economy. What it is really about is saving the big boys from their folly–at our expense. I can only wish I had a good read on what to do for our meager assets–besides work till I die.