Own The Upside

Sebastian Mallaby comes out in favor of nationalization:

Paulson made clear last night that he favors a minority stake. But from a purely financial perspective, it would be better to buy the whole caboodle. If the government is going to supply a rescue, why share the upside? The worry about adding to the federal debt turns out to be a digression. Although Fannie and Freddie owe an astronomical amount, they are owed a roughly similar amount. The net effect of nationalization on the federal debt would be modest. [...]

As long as Fannie and Freddie retain their private/public form, private managers will invent reasons to grow courtesy of public assistance. The best shot at taming them is to bring them into the government. Then, once financial markets have stabilized, the government should shrink the institutions radically and spin them off in pieces, creating maximum space in the mortgage market for smaller private players.

This sounds good to me and if Mallaby can say it then why not progressive politicians, too? Meanwhile, based on his column this didn't seem to me to be where Paul Krugman was heading, but he writes in a followup "So what should be done about the GSEs? If they must be rescued, the stockholders should be cleaned out — which would, in effect, return us to the situation pre-1968."

Comments

the government should shrink the institutions radically

Uh, when has that ever happened?

Posted by Jimmy Jazz | July 14, 2008 2:00 PM

If he thinks "smaller private players in the mortgage market" could perform these functions, then he obviously has no clue why Fannie and Freddie had to be invented in the first place.

He's half right. They should be nationalized- and stay that way. Enough of socializing risk while privatizing profit.

Posted by Steve LaBonne | July 14, 2008 2:07 PM

Pre-1968 sounds good, it's about time the crony capitalism is displayed for all to see (sorta like the emperor with no clothes).

Of course, this shouldn't be limited to what happened to the Maes, but also the crony accounting on social security which allows that trust fund to be spent on other things (thus also generating a situation where a "crisis" is sold as needing to shrink social security, when that's not really the problem at all, it's that hooligans embezzled the money for their own gain).

People should start looking at what "lower taxes" has bought them over the past 8 years too - an incompetent if not unwilling government which will most certainly ensure that with bailouts and extravagant unnecessary expenditures any savings from the tax cuts will be doubled by losses, except perhaps for the super rich who have the resources to make sure Bush pays attention to their concerns (unlike the less fortunate, like those in Louisiana and Mississippi who never received the help they need pre, during, or post crisis, including all the stuff that was actually there to assist but never actually delivered).

Criminal inquiries should be all over the place as regards this administration, as well as in the corporate sector. It's time to clean out the shit because it's really starting to stink and it's getting ridiculous, how long will we continue to fall for this shell game?

Posted by Jimm | July 14, 2008 2:14 PM

If you leave any private shareholders you will essentially end up rewarding (or at least backstopping ) them for their faulty risk decisions. In fact you are providing a going forward level of tax payer sponsored comfort for current and future private investors, which I guess is the point, but why should I pay for the past mistakes and profits taken by so many other individuals.

Anyone who complains about progressive taxation should see the hypocrisy in the regressive tax effect of a minority stake solution. Privatization or nothing. The middle ground is unfair.

Posted by Tom | July 14, 2008 2:16 PM

If the GSEs are "too big too fail" then we should condition any bailout on a reorganization into a large number of much smaller entities and remove the government backstops. "Too big to fail" is just a synonym for "can't be held accountable."

And there's really no inherent reason why mortgages should be "guaranteed" by anyone, anymore than auto loans, consumer credit card debt, etc. should be guaranteed. The guarantee just encourages reckless lending behavior, which is what created this fiasco in the 1st place.

Finally, as a matter of fairness, is there any reason why tax paying renters should pick up the tab for failed mortgages any more than tax paying homeowners should pick up the tab for dead beat renters?

Posted by kafka | July 14, 2008 2:41 PM

Of course, this shouldn't be limited to what happened to the Maes, but also the crony accounting on social security which allows that trust fund to be spent on other things...

Or, to put it another way, let's hurry and get the Maes back into the federal government so we can start running them properly -- just like social security!

Posted by Mike | July 14, 2008 2:46 PM

Which is quite well run, as well-known by those who are smart enough not get their "information" from right-wing propaganda.

Posted by Steve LaBonne | July 14, 2008 2:49 PM

And there's really no inherent reason why mortgages should be "guaranteed" by anyone...

I think there is a market for guaranteeing loans. I just don't see what the guarantor has to be the U.S. government.

BTW, isn't a mortgage guaranteed by the value of the house? And then what about PMI for loans with smaller equity positions? It seems like guaranteeing a collateralized loan whose borrower has PMI is a little bit of Department of Redundancy Department.

Posted by LFC | July 14, 2008 4:36 PM

Umm, yeah - the tiny little brakes the shareholders put on moral hazard should be removed completely, so that the moral hazards can get truly large.

This can be classified as thing number infinity that is beyond Matt's grasp.

Posted by James Robertson | July 14, 2008 10:09 PM