Thursday, July 31, 2008

More Fannie and Freddie

One of the other disturbing aspects of the housing bill is that on top of raising the cap for conforming loans that fannie and freddie can buy (essentially rewarding their insolvency), Congress seems to think it can wipe away all of Fannie and Freddie's ills with a new regulator. In the recent housing bill Congress abolished OFHEO (FM/FM's prior regulator) and created a new one with a new fancy name. I don't see what this will accomplish other than delaying eventual regulatory capture. If Congress was worried about systemic risk it would tide Fannie and Freddie over and then wipe out its shareholders, potentially nationalize the whole affordable housing part, and sell of the rest of Fannie and Freddie in pieces.

Thursday, July 24, 2008

Housing Crisis

I think one of the elements missing in the discussion of the housing crisis is whether or not the government should be subsidizing home ownership to the extent it does or at all. Home ownership is generously subsidized through the tax code in the form of the mortgage interest deduction and additionally in the form of the implicit now made explicit guarentee of Freddie and Fannie's debts. Home ownership is something of a fetish in American political discourse and thus has long been untouchable. Maybe we can use this moment to move towards a more rational approach on home ownership rather than doubling down.

Fannie and Freddie

It appears that Fannie and Freddie are about to be rewarded for their failure. While it is understandable that the government would want to bail out the GSEs because they are "too big to fail", it is not understandable that Congress seeks to reward the GSEs by lifting the cap on conforming loans from $417k to an excess of $600k that Fannie and Freddie can buy. I think the discussion of what to do with Fannie and Freddie should focus on whether to nationalize or privatize (and by privatize, I mean no implicit nor explicit guarentee) Fannie and Freddie. And in either scenario the shareholders should be wiped out.

Wednesday, July 16, 2008

Brilliant Blog Post on GSE's by Larry Summers

Courtesy of Creative Capitalism:

Here is a really good creative capitalism idea. All Americans benefit from increases in home ownership because of the values like hard work, community, and respect for property that ownership instills. Families want desperately to own their own homes and accumulate equity. Yet it is very hard for conventional banks that borrow money over the short term to lend over the kind of 30-year horizons that best help families buy houses.

How can the objective of ownership be best supported and how can the most adequate financing be assured? Voila, creative capitalism! How about chartering private companies as government sponsored enterprises with the mission of promoting home ownership affordability? Give them boards with some private representatives and some public representatives. Make clear that government stands behind their capital market innovations so they can borrow more cheaply and pass the savings on. Exempt them from the state local taxes that others pay. Give them specific objectives on affordability that they must meet. Rely on a special government regulator to assure that they balance their social responsibility with their drive to profit. Harness the profit motive to meet a social objective.

This is roughly the rationale behind Fannie Mae and Freddie Mac. I would submit that it is about as good or as bad as most creative capitalism ideas involving joint profit making and social objectives. But one hopes that ee are now witnessing the end of this particular experiment in creative capitalism: the government is moving to pick up the pieces of the mess the GSEs have made and their shareholders are losing most of their money.

What went wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were "private companies.” But market discipline was nearly nonexistent given the general perception -- now validated -- that their debt was government backed. Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.

I wonder how general the lesson here might be. My fear is fairly general. Inherent in the multiple objectives urged for creative capitalists is a loss of accountability with respect to performance. The sense that the mission is virtuous is always a great club for beating down skeptics. When institutions have special responsibilities it is necessary that they be supported in competition to the detriment of market efficiency.

It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.

Tuesday, July 15, 2008


What the hell is it?

Should We Stay or Should We Go?

That's the central question regarding our policy in Iraq and should be one of the main questions dominating the news cycle. In my view, the Iraqis have answered it for us, they have asked to sit down and establish a timeline for withdrawal. If in fact the objective is to establish a sovereign state, then we should respect that state's sovereignty. Time to go home.

Thursday, July 10, 2008

Tyler Cowen on Climate Engineering

"I don't know much about the technologies but my worries are mainly political. Won't the Russians benefit greatly from a warming world, both because they are a bit cold and because they will access a warmer Arctic? Would the UN Security Council approve climate engineering? Probably not. If the United States did it on its own, could that be perceived as an act of war? If geo-engineering is cheap (which is part of its very promise), and unilateral action is acceptable, don't other countries also get to take their shot at influencing the environment and moving us toward an optimal climate? What does the resulting equilibrium look like? Who moves last? How would we feel if someone changed the U.S. climate to make many parts of the country colder?"

Wednesday, July 09, 2008

Good Riddance

Jesse Helms is dead and thank goodness for that. He was an insufferable bigot.

Tuesday, July 01, 2008

Throwing Wes Clark Under the Bus

If you distill Wes Clark's comment to its essence it was that McCain's service and sacrifice do not make him qualified to be the president. Clark's comment in now way discounted McCain's sacrifice, he simply said that which is both obvious and true. It's unfortunate that Obama felt he had to throw Clark under the bus. I understand why he did it, but it is unfortunate and distasteful nonetheless.