Markham Lee_

Bailouts: Misunderstanding the Moral Hazard

In my opinion if things are 1/10 as bad as Paulson would lead us to believe, then the banks are desperate and will happily participate punitive damages or no.

Besides in my view the situation should be handled like FDIC receivership: "Sorry but we're MAKING YOU do this, you will suffer greatly, get over it"

But maybe I'm just being an overly Calvinist bear again, it's happened before

-M

The Weekend American Capitalism Died

sr9web

As an armchair QB I'm not saying that the Government shouldn't have stepped in, because Fannie & Freddie collapsing would've had a cataclysmic impact on our economy. What I am saying that is that various policies/actions have been killing capitalism for decades, the takeover of the Mortgage GSEs was merely the sign, not the cause per se.

SO what would I have done different?

Managed the GSEs better and reigned them in years ago especially during the credit crunch, as opposed to recent policies that had them expanding their investment activities despite their suspect capitalization levels.

Better managed the banking system during the housing boom, especially with respect to lending standards.

The credit crisis could've easily had been prevented if people had been willing to make inconvenient decisions, as opposed to telling taxpayers how great things are and celebrating faux housing wealth.

-M

A Look at Freddie's Trailing Six Quarter Performance

To be sure I'm not a big fan of the GSEs existence in general, as I don't think the government should be in the business of providing a quasi-subsidy for housing.

BUT

I'm not going to win that war.

So I'd like to propose that the GSEs be broken up into smaller companies that will be split up into new companies if they grow larger than a certain size. The idea is not to manage the GSEs from the perspective of pump as much liquidity into the mortgage markets as possible, but from the perspective of minimize the risk such an organization poses to the economy.

The idea that the Government has created two companies that have the potential to dump massive liabilities on the tax payer, wreak havoc on the economy and on the global credit markets is just criminal. Steps need to be taken ASAP to reign in the GSEs, curtail their investments and break them up in order to spread the risk around.

-M

The Mortgage GSEs Should Be Broken Up - Before It’s Too Late

Bailing out the mortgage GSEs could potentially cost 100s of billions if not trillions, if such an event were to occur it would NOT investors more faith in the market because it would evidence that conditions must be beyond abysmal for such a thing to happen.

Furthermore the mortgage GSEs purchased 80% of the total mortgages sold to investors last quarter, without the participation of the mortgage GSEs other investors would lose confidence and there would be very liquidity in the mortgage market.

If liquidity in the mortgage market dries up, the housing crisis would undoubtedly get much, much worse.

Considering the role of the housing crisis in the credit crunch, it's absurd to think that a government bailout of the mortgage GSEs would end the credit crisis.

-M

The Stimulus Package: A Mixed Bag with Limited Potential Impact

The investments should be designed to deliver long-term ROI, not short-term bumps in consumer spending whilst we wait for "something" to happen to fix the economy.

If transportation can be that investment, than let's do it - if not, let's do something else

Our thinking needs to go back to the pre WII and post WWII periods, where investments in FHA, VA Loans, the G.I. Bill, Rural Electrification, the Interstate Highway system, etc, delivered real returns to the country for decades.

We have a choice, we can go for a short-term bump or build something that can deliver dividends to our grandchildren.

In many families in the U.S., those that went to college on the G.I. Bill and bought the family home with a VA loan, were the first generation of middle class people in that family. In effect many middle class Gen X'ers are upper-middle class today due to those first steps taken by their grandparents, we need to implement similar programs today if we're going to spend money to stimulate the economy.


-M