Monday, September 22, 2008

Follow Up: Gears and Levers Buried at the Roots (updated)

Yes, here I am already with a follow-up less than 12 hours after my initial post. I just couldn't resist linking my stream-of-consciousness with that of John Steele Gordon, who guest-authored an awesome Freakonomics blog today. While I called out evil's name: DEBT ... he called out the names of its creator: The Fed (via artificially low interest rates) and Fannie and Freddie (via artificially low interest rates).

Behind both: Congress and the executive branch

Perhaps Barney Frank should have taken the fifth back in 2003 instead of putting his foot in his mouth incredibly:

in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis ...

I do not think at this point there is a problem with a threat to the Treasury ... if investors take some comfort and want to lend them a little money and less interest rates ... there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own ...

Fannie and Freddie have played a very useful role in helping to make housing more affordable ... a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing ...

I believe that we, as the Federal Government, have probably done too little rather than too much to push them

Hat tip to Mark J. Perry for plumbing the NY Times archives to find an even more obvious smoking gun ... and more importantly, genuflection and alms to Steven A. Holmes for (perhaps unwittingly) playing Cassandra. He spake thus in 1999:

...Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits...

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer...

...Fannie Mae is taking on significantly more risk ... the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Unlike FnF, the Fed is supposed to be independent of political wrangling, but Greenspan himself griped in his book about the unprecedented level of meddling he saw in his last years ... as well as in the future:

In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist

I fear that my successors on the FOMC [Fed], as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress if not from the White House

To John's list of culprits, I will add the following ... with a caveat: good came with the bad. Low interest rates only presented the opportunity for the imprudent to over-borrow. High savings in certain pockets of the world economy enabled cheap lending in other pockets.

OK, caveat said ... the US government would not have been able to support their low-interest strategy for long without:

  • Asian Savers (the Chinese government buying Treasuries, Japanese middle-managers saving 110% of their income, a billion citizens of industrializing countries squirreling away a buck apiece) flooding the money markets with dollars over the last 15 years

  • Oil Producers (ditto)

  • Baby Boomers (saving up for retirement; granted, they borrowed in lockstep)

Cartoon credit:
Updated to include Barney Frank Quote 9/23/08 1:30 PM EST

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