July 22, 2008
Treasury Secretary Says U.S. Must "Boost Confidence" in Fannie Mae, Freddie Mac
Today, Treasury Secretary Henry Paulson is making remarks at the New York Public Library about the economy, and, according to text of the speech, he'll say he believes Congress will pass a bill to "boost confidence" in failing government-sponsored Fannie Mae and Freddie Mac, which, as Bloomber News puts it, "account for almost half of the $12 trillion mortgage market." Paulson has also been making a number of public appearances recently--Face the Nation, CNBC, various Times reporters and editors-- to boost confidence in the bill itself. In other financial news, with new CEO Robert Steel (former Treasury Undersecretary), Wachovia is announcing $8.9 billion in losses; the bank said it was leaving the wholesale mortgage business yesterday.
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This mortgage-backed securities crisis is a case of market failure. The sad fact is that government intervention is needed not only to preserve certain institutions but simply because investors will not behave rationally (a pre-condition for functioning markets) and because asymmetry of information availability exists (another pre-condition). Also, "people" cannot bear the real impact of letting the markets find their natural equilibrium points. Things will get much worse in coming months. We're looking at final recognition of the permanent impairment of the U.S. economic machine after a couple of decades of willful ignorance.
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They failed, but would you call it a market failure? I'm sure some out there are calling it a failure of capitalism---not your words, I know.
I see it as a problem of government's easy monetary policy which allowed for those ridiculous ARMs that were going to have to reset eventually, which is what we're seeing now as people can't pay up. Of course the lenders are part of the problem, but the root is the liquid money supply.
So I agree, somewhat. Yes, it's a market failure, but our policies do nothing to prevent these. All we do is try and rescue companies that fail with more inflated money.
I also agree with your prognostication that things will get worse. Housing prices are going to continue to fall everywhere--NYC, too.
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Have faith Anna. Don't underestimate the resilience of the American economy, especially that of the American consumer. The market will adapt to the changing reality and the government will (hopefully) clamp down on the methods banks use to spread around risk. But the pain will definitely last a little longer than the last downturn.
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I couldn't have less faith, especially with what you gave as a pep talk. I'm not trying to flame, Kojak.
1. The American consumer IS the problem. Look at our trade deficit. All of those Chinese products come over here, and nothing goes over there---or anywhere else for that matter. We're a service economy now who only seeks to serve ourselves. We use others for their resources and goods and pay them in virtual IOUs. The thing is: We're not ever going to pay those back. And eventually the yuan will have far superior purchasing power than the dollar.
2. The last thing we need is the government to put their hands into anything else! You talk about the banks and lenders being risky, but the moral hazard comes from the government bailing them out at every point. ARG!
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"Look at our trade deficit. All of those Chinese products come over here, and nothing goes over there"
We'll that's not entirely OUR fault. Their goods are far cheaper to produce and their pretty good at mass production. Its the price we pay for Globalization and a high standard of living we have here. But I agree that the American consumer needs to stop spending more than they make and the gov't needs to stop hemorrhaging money.
If the government shouldn't get involved with getting the banks in line, who will? Surely you can't expect them to police themselves. They'll just find another way to get way over their heads. Usually I would be against government intervention in these cases but having Fannie Mae & Freddie Mac collapse would've been a disaster of epic proportions.
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Banks fail. Stock market declines. US dollar is devalued. World/US/local economy sputters. NYC housing market deflates. Inflation goes up. Unemployment goes up. Crime goes up.
You knew we were in trouble back in 2004, when then-Federal Reserve Chair Alan Greenspan was suggesting adjustable rate mortages were a good idea, saying things like: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage" and "The traditional fixed-rate mortgage may be an expensive method of financing a home."
Otherwise smart people talked about the mortgage interest tax deduction as if they were making money from it, when all that deduction really does is lower the interest rate on debt. You pay 7% interest on a loan but, because it's deductible, you aren't taxed on those interest payments, lowing the actual interest you pay by your tax rate. So your effective interest rate might be 4% instead of 7%. But you are still paying interest on a debt.
People saw apartments that were $250k one year sell for $350k the next, and $550k the year after that, so justified spending $700k because $1M was just around the corner. But property prices could easily decline from here, and ownership costs- taxes, maintenance fees, insurance, heat, etc., are increasing. As long as your income stays the same, you might be okay. But the downturn is starting to eliminate some of those high paying jobs, and everything is getting more expensive.
Even if the prices on NYC property have so far escaped the declines seen in Vegas, and Florida, and SoCal, because of the erosion of the US dollar, the value of property has declined over the last couple of years.
We can't spend or borrow our way out of this cycle. We're clearly in for some pain, the only questions are how much and for how long.
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Globalization is always an interesting term where the definition changes with whomever is speaking. One indisputable effect, however, is that goods travel more freely between nations. And as our nation has huge protectionist polices, the FTC, minimum wage laws, environmentalist policies that just raise costs, and a host of other restrictions--producing in this country is hurt. So, we must import. When we import, we pay out in IOUs; this is the issue, and you didn't address it. Our high standard of living is being paid for with non-existent money.
And as for saying the government spends too much, I'll always agree with that statement.
This is where some of the "magic" of the marketplace comes into play. You have to first understand that businesses failing is not a bad thing. In a vacuum, disregarding the policies that protect big business, a mom and pop sub shop that goes out of business because a Subway moves in across the street isn't necessarily bad. If the mom and pop store was "that" good, and efficient with their budget they could survive and, perhaps, do better as more people would eat subs instead of, say, pizza.
With the lenders falling apart, you neglected to see my reason for why they die: Easy money. This is a problem from our Federal Reserve and Congress. With a firmer monetary policy we would see fewer banks and mortgage lenders failing because they wouldn't indulge in riskier ventures.
And then there's the moral question: Why should I, as a taxpayer with great credit, pay for the bailout of someone who never should've been able to buy a house and for a company that took a huge risk and missed? Gambling on sports is a huge industry. I know as a gambler that I incur a huge risk when I place my money down. When I lose, I don't look for the casino to bail me out or hit up family members. I'm responsible; bet what you can afford to bet.
The same moral principle applies here.
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I suggest anyone seriously concerned about our country's economic future read "Nightmare on Wall Street: Washington Can't Bail out the Sea of Red Ink"
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we were in trouble when they started calling stuff like securities and insurance policies and such "Products" they're not products.
dumb econ 101 morons, supply and demand nuts, let the market run it's course and keep shopping fools.
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"Usury, to be clear about it, is rich people taking advantage of poor people by lending them money on terms that are sure to make them fail."
This doesn't make any sense, since you don't make any money when the loan isn't repaid. Banks are making less than zero money right now. Wachovia just reported a $9b loss.
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Memo to Hankie P.:
It's not confidence that's getting "boosted".