Tag Archives: fannie mae and freddie mac

Grab Bag Wednesday – It’s the economy

Good morning!

  • Interesting study by the conservative American Enterprise Institute reveals that Medicaid spent more money than it should have on brand-name prescription drugs. Over $300 million was “wasted.” This is a significant sum of money. In my opinion, the conclusions of the study are somewhat misguided. It is true that Medicare and Medicaid need to save money wherever possible. They need to figure out how to do this in a safe and cost-effective manner. On the other hand, I’m not sure that forcing generic drugs on patients is the right way to go. Instead, negotiate for fair and lower prescription drug prices. Use the power of the government, the power of the big purchaser (like Walmart) to push prices lower.
  • NPR has begun a multipart series on Fannie Mae and Freddie Mac. The first installment is well worth a listen. (I talk about Fannie and Freddie, here and here.)
  • Is Greece the Argentina of this decade? The financial troubles of the Greek government continue to plague the European Union.
  • Weak home sales are an ominous sign for the economy.
  • I’m not sure what we were expecting in Libya. It seemed to me that the press was playing up some advances that the rebels made along with the “success” of our airstrikes. It appears that the rebels have taken some losses over the last 24-48 hours. Look for the United States to begin to supply the rebels with better weaponry. (Man, am I getting multiple different flashbacks – Somalia, Afghanistan of the 1980s. This is not good.)
  • Please correct me if I’m wrong but it is my understanding that a recession occurs when there is an overall lack of spending. There’s plentiful supply but nobody’s buying. How do you fix this problem by shrinking the size of government? The Republicans have never answered this question adequately; at least, I don’t think so. They continue to argue that we can cut our way to prosperity. Watch the video:

Visit msnbc.com for breaking news, world news, and news about the economy

The final installment: conservative questions; progressive answers

My first two installments are here and here. Let’s continue.

  • When did it start making good business sense for the U.S. to hold preferred stock positions in small local banks, as the new small business stimulus allows?
  • When did it become fiscally responsible to have to borrow just to pay interest on the National Debt?
  • When did it become fiscally responsible governing to owe so much money to a country like China?
  • When did we become a nation in which WE THE PEOPLE told the government what we wanted, and then were ignored by those whom we voted into office?

When did it make business sense not let the economy collapse? Sometimes it is mind-boggling that conservatives ask these questions. Let’s go back. The U.S. economy was in freefall. Because of complex derivatives, credit default swaps, CDOs and other exotic financial tools, our banks are more interconnected than ever. It turns out that almost 1/4 of the banks in the United States own stock in Fannie Mae and Freddie Mac. You don’t have to be a financial genius to figure out that if some of these banks have borrowed against these stock holdings, they are in trouble. The question is, what would be the intelligent way to stabilize small banks? Conservative ideology would tell you to let the market sort it out. Translation: let millions more Americans lose their jobs, let the credit markets seize up and convince Americans this is all for their own good. Or, intervene, stabilize the markets, stabilize the small banks and mitigate the suffering and loss for the American people. One way can keep Americans working and the other invites a second Great Depression.

When did it become fiscally responsible to have to borrow just to pay interest on the national debt? Where’ve you been? Republicans haven’t been fiscally responsible since before Nixon. The interest on our national debt in 1988, the last year of the “Great Communicator” was $214 billion. Where was your outrage then? When George H. W. Bush and then George W. Bush, the sequel, never presented a balanced budget to Congress, where was your outrage?  I guess it became okay to let China buy our debt when it became okay to go to war over oil. A war that we never budgeted for, never decided to sell war bonds to pay for. Where was your outrage… then? I have a huge problem with this selective financial argument. Look, if you want to be financially responsible then let’s have an honest discussion on how D’s and R’s aren’t getting it done. If we are going stand around and fear-monger, then I don’t have time for that. Sorry.

When the majority of Americans decided they did not want to go to war in Iraq, where was your frustration, outrage and condescension? Gallup polls just before the invasion show the majority of Americans were not in favor of the war. How was that different? Was that just a strong president being decisive?

So, instead of asking thoughtful questions we have a list of partisan pet peeves. That’s fine, but it does nothing to further our national debate. How do we get out of this massive debt hole? I’m happy to have the discussion. I’m happy to have the discussion just as long as everything is on the table, but for the most part, conservatives don’t want everything on the table. The defense budget is off-limits. When did it become fiscally responsible to spend tens of billions on missile defense when test after test has shown that it doesn’t work? We don’t have the available technology right now. Why don’t we scale back, go back to the drawing board, something? Instead, we keep throwing good money after bad. I’m happy to have the discussion about cutting Medicare and Medicaid benefits as long as conservatives are happy to have the discussion about raising taxes. If the goal is to decrease deficits, then we need to increase revenues and decrease expenses. Put everything on the table. Now let’s have the discussion.

Did Fannie Mae and Freddie Mac cause economic meltdown?

Conservatives, as the economy began to melt down quickly in 2008, began to target one of the programs that they truly hated, the Community Reinvestment Act. They pointed to this one program, which started back in the Carter administration, as the root of all evil. The conservative argument goes something like this — the community reinvestment act asked banks to lend more money to minorities and Americans who lived in impoverished areas. Therefore, the banks were forced to hand out riskier mortgages. This whole operation was funded through a mandate of Fannie Mae and Freddie Mac. So, with Fannie and Freddie pumping money into the mortgage financial system and bankers being “forced” to lend money to people who were obviously not qualified, there’s no surprise that these mortgages ultimately failed in a spectacular fashion.

This tale is like many tales that come out of the conservative movement. There is a shred of truth located deep within the story. Unfortunately, there is only a shred of truth. First, it is important to understand how the mortgage industry works. I thought, if I go to the bank, Friendly Bank, and I’m approved for a loan, Friendly Bank gives me the money to purchase a house. I thought that the loan stayed at Friendly Bank. I was wrong. That’s the way loans worked in the old days. Now, Friendly Bank will take my loan and do one of two things — sell the loan to another financial institution or package the loan with other loans and then sell that to a financial institution. This is where mortgage securitization comes in, along with derivatives and collateralized debt obligations and much more craziness. Fannie and Freddie worked in the secondary markets. It is true that Fannie and Freddie injected liquidity into the housing market. They are able to buy qualified loans (notice the word “qualified”) from banks and then pass those loans on to other financial institutions. “The riskiest mortgages, however — the ones that were pushing the housing bubble to dizzying heights — were simply off-limits to Fannie and Freddie.” (From Simon Johnson’s book 13 Bankers, p 145.) Fannie and Freddie were barred by law from handling these risky subprime mortgages.

When you look at the subprime mortgages that were issued at the height of the craze, between 2004 and 2006, Fannie and Freddie only sold approximately 24% of those loans. In 2006, 84% of subprime mortgages were issued by private lending institutions. These loans were then passed on to other private institutions, bypassing Fannie and Freddie. Although Fannie and Freddie Miami have wanted to get into the fray, they were unable to participate. “Private investment banks — not Fannie and Freddie — dominated the mortgage loans that were packaged and sold into the secondary mortgage market.” Over 66% of these loans stayed in the private sector.

This reason that conservatives continue to push a story that they know is not true is because the truth is very scary to them. The truth is capitalism worked the way it was supposed to work. Capitalism is about greed. Capitalism is about looking out for your own interest. This is exactly what these private investment banks did. The point of the federal government is to constrain the excesses of capitalism. Put another way, people always look for ways to make money. If there are no regulations, then people will make money any way that they can. Some will even rip off their own grandmother to make an extra dollar. Alan Greenspan and Henry Paulson (and almost everybody on the Bush financial team and unfortunately, this includes most of Obama’s financial whiz’ also) believed in self-regulating markets. They believed that the purer the market was, the better the market would regulate itself. Unfortunately, they did not factor in one of the most important things in human nature — greed and deception. No investor will always have all of the information. Financial institutions have intentionally created an atmosphere where they hold most of the cards. They only reveal the cards they want you to see; therefore, no investor is fully informed.

So, in summary, Fannie and Freddie did not cause the economic meltdown. The Community Reinvestment Act did not fuel the economic meltdown. There was a climate of deregulation, mortgage derivatives and collateralized debt obligations, which were designed to hide risk and were sold to investors as safe. These mortgage securities were stamped with triple-A ratings,duping investors into thinking that they were safe. Because the primary lender had the ability to pass off loans to someone else, there was less worry about the quality of those primary loans. There you have the cycle. You have a nearly infinite supply of investors who want low risk, yet high yield investment opportunities. These mortgage-backed securities were sold as exactly that — low risk and high yield. Unfortunately, for all of us, they were not low risk. Not even close.