Summers on the GSEs

If I'm understanding Larry Summers correctly he's saying we ought to nationalize Fannie and Freddie:

In this scenario, the government would operate the GSEs as public corporations for several years. They would then be in a position to extend credit where appropriate to support resolution of the housing crisis. Once the crisis has passed, the federal government would divide their functions into government and private components, the latter of which would be sold off in multiple pieces. The proceeds could be used to fund the low-income housing support activity that was previously mandated to the GSEs.

I'm not going to pretend to have any real expertise in this field, but a surprisingly broad (surprising to me, at least) range of knowledgeable people has taken something like this position and it's the one that seemed intuitively correct to me in the first instance. I've yet to hear any convincing arguments to the contrary or, indeed, any real effort on the part of either the administration or the congress to so much as explain why these sterner measures aren't on the table.

Comments

Someone needs to take away the punch bowl b/c Wall Street got drunk!

(But remember big govenerment regulations are evil and anti-American).

Posted by Peter K. | July 28, 2008 3:51 PM

Someone needs to take away the punch bowl b/c Wall Street got drunk!

(But remember big government regulations are evil and anti-American).

Posted by Peter K. | July 28, 2008 3:51 PM

Instead it looks like Hammerin' Hank Paulson is hoping that the GSEs can be shrunk within their current ownership structure by promoting alternative forms of mortgage securitization. Note today's touting by the Treasury of a, gasp, European solution, where banks issue their own mortgage-backed securities. Taking over the GSEs would be a European step too far.

Posted by P O'Neill | July 28, 2008 3:52 PM

Not to wear your patience again with the so-called liberal media, but should be noted that The Times managed two separate opinion articles in about as many days, without a rejoinder, going to the opposite extreme. Both blamed the housing boom, seriously, on too much regulation, in a supposed assurance that the feds would always bail out losers well beyond the banking system they're formally committed to. One article was from Cato, on the OpEd page, the other from Roger Lowenstein in the Sunday magazine.

Posted by JohnH | July 28, 2008 3:59 PM

I may be a simple southern lawyer, but the part where he talks about privatizing parts of FM^2 seems important.

Sebastian Mallaby, who is as doctrinaire as you can get about capitalist markets, also wrote a column in favor of nationalization. I was surprised until he made it clear that the ultimate purpose was to shrink the two organizations until... well, Grover Norquist can tell you the rest.

Posted by kegler | July 28, 2008 4:07 PM

More to the point, there is near universal consensus among Democratic-leaning policy wonks on this point. Why is Barack Obama not calling for it? Will Chuck Schumer stop liking him?

Posted by Nicholas Beaudrot | July 28, 2008 4:08 PM

Um, because nationalization would end the politician-linked gravy train for people like former Obama-VP-vetter Jim Johnson and Clinton budget director Franklin Raines?

Simple answers...

Posted by Al | July 28, 2008 4:12 PM

I think we are seeing that a financial entity that is 'too big to fail' is also 'too big to save'.

Put another way, laws and regulations should be put into place that forbid (and break up) any financial institution (including hedge funds) that the 'system' can't allow to fail because the 'system' would be in danger of collapse.

This seems to be what Summers means when he says: latter of which would be sold off in multiple pieces (in regard to the private functions to be sold off, someday).

Consolidation of the financial services industry (and deregulation ala GOP style) has not served the country or the world well. Let's learn from that, halt it, and reverse it.

Posted by JimPortlandOR | July 28, 2008 4:12 PM

At the risk of sounding like Petey, I have to say this post really calls to mind the hackneyed axiom that it's hard to get a man to understand something when his salary depends on his not understanding it.

Put in a less aggressive way, I'd say that if you were the sort of person who is capable of describing the situation in a straightforward way - that the American system is one based heavily on private profits protected by socialized risk - you wouldn't be employed by The Atlantic because you would be a dangerous, unserious leftist.

APS

Posted by Ape Man | July 28, 2008 4:13 PM

Once the crisis has passed, the federal government would divide their functions into government and private components...

I'm mostly in agreement with Summers, but want to ask, what functions need to remain as government components. Once the crisis has passed, why does any taxpayer money need to remain involved in the mortgage lending business?

Here's a slightly different take from William Poole (http://www.nytimes.com/2008/07/27/opinion/27poole.html?ref=opinion):

I find it deeply troubling that Fannie and Freddie, essentially in receivership to the secretary of the Treasury today, continue to employ lobbyists and hand out campaign contributions to influence the legislative debate over their own futures. Fannie and Freddie paid out more than $170 million to lobbyists over the last decade — more than General Electric spent. Government departments cannot hire lobbyists or give money to campaigns — why should Fannie and Freddie, now wards of the government, be permitted to do so? The long-term health of the mortgage market is too important to be left to only two firms. If Fannie Mae and Freddie Mac can survive as vigorous competitors without the special government privileges they’ve long enjoyed, fine. But if they insist on coming back to life as public-private hybrids with all sorts of unfair federal advantages, we’ll only be setting ourselves up for more disasters. The wisest move, in the end, is to carefully let them wither away.

Posted by Jaspe | July 28, 2008 4:14 PM

While I'm sure that no one MattY knows disagrees, let me suggest a different tack to this issue than that normally employed here by our host. Namely, intellectual honesty.

So, consider this, this, or these:

angelfire.com/pa/sergeman/issues/welfare/corporate/GSEs.html
house.gov/paul/congrec/congrec2002/cr071602.htm

(Yes, I know: bad people with bad thoughts! Ignore!)

Note: I'm certainly no expert on these matters, I'm just used to pointing out how MattY is wrong on other things.

Posted by TLB | July 28, 2008 4:29 PM

Knowing less about the issue than Matt, I would argue that the main reason to keep certain mortgage lending functions nationalized would be to promote homeownership for people that are seen as too risky by the market. As we have just learned, nobody is too risky for the market. So no - there doesn't seem to be a reason to keep 'em around.

Posted by john i | July 28, 2008 4:43 PM

Seems to me the government knows it's going to have to nationalize Fannie and Freddie. Part of the emergency help already in place is the permission for the US treasury to buy stock in the company.

Posted by Reversed | July 28, 2008 4:49 PM

I just think it's funny how fragile the financial system is. The thing's constantly threatening to collapse and ALL of this seems to fly in the face of rightwing market ideology.

The conservatives talk of moral hazard, but they're full of it.

The "risk-takers" who put the financial system in jeopardy employed those very same conservative legislators to protect them from regulation.

Now those conservative legislators say these "risk takers" should suffer to prevent future moral hazard, meanwhile it would bring down the entire financial system. Thing is some Democrats are in on it too.

Obama put it plainly in an interview with the Wall Street Journal, worker productivity has gone up these past decades but their share of the pie hasn't. We should reward work not wealth.

Meanwhile Hillary was voting with the big banks interests in mind on the Bankruptcy bill.

Posted by Peter K. | July 28, 2008 5:09 PM

We are fucked. It will end up costing the Treasury, that's us around $2 trillion to bail out the GSE's. If bailout is the word, or if they can do it. Where is the money going to come from. Will the rest of the world loan us the money to bail out Fannie? In the meantime the deficit since May 15th has grown by $362 billion.

The official projection for next years fiscal was annunced today, at $460 billion. Hahaaahhahhhhhhh. It's going to be a trillion.

Posted by rapier | July 28, 2008 6:24 PM

If by "nationalize" you mean assuming ownership and control of Fannie and Freddie, as-is, without compensation to the shareholders... then I'm all for it. But if it means compensation in any form to current shareholders, then it's a bad idea because no one really knows what the value of Fannie and Freddie assets are, and that means the price paid under nationalization will be determined by lobbyists and lawmakers. Not a good situation.

The likely solution is the best: provide guarantees and/or lines of credit sufficient to prevent the GFEs from going under while letting the housing market bottom out. Price the guarantees/credit against US Treasuries equivalent in value and time to the lines of credit. Discount that price for any social good the government desires (saving neighborhood property values, sponsoring lower-income home ownership, et al.) Then, if they tap the line of credit, put Freddie and Fannie on the hook to pay back Uncle Sam with future earnings, even if it takes 20 or 50 years.

The taxpayer is assuming the risk, so the taxpayer should profit from that risk. The devil is in the details, of course, but the bill passed over the weekend has elements of the best approach... except that it provides basically free credit the the GFEs.

The reality is that so-called private capital, and elite capitalism in general, has always socialized risk and privatized profit. A truly democratic society shouldn't stand for it. What happens to Freddie and Fannie will show us just how (un)democratic our society really is.

Posted by hyh | July 28, 2008 7:58 PM

If by "nationalize" you mean assuming ownership and control of Fannie and Freddie, as-is, without compensation to the shareholders... then I'm all for it. But if it means compensation in any form to current shareholders, then it's a bad idea because no one really knows what the value of Fannie and Freddie assets are, and that means the price paid under nationalization will be determined by lobbyists and lawmakers. Not a good situation.

The likely solution is the best: provide guarantees and/or lines of credit sufficient to prevent the GFEs from going under while letting the housing market bottom out. Price the guarantees/credit against US Treasuries equivalent in value and time to the lines of credit. Discount that price for any social good the government desires (saving neighborhood property values, sponsoring lower-income home ownership, et al.) Then, if they tap the line of credit, put Freddie and Fannie on the hook to pay back Uncle Sam with future earnings, even if it takes 20 or 50 years.

The taxpayer is assuming the risk, so the taxpayer should profit from that risk. The devil is in the details, of course, but the bill passed over the weekend has elements of the best approach... except that it provides basically free credit the the GFEs.

The reality is that so-called private capital, and elite capitalism in general, has always socialized risk and privatized profit. A truly democratic society shouldn't stand for it. What happens to Freddie and Fannie will show us just how (un)democratic our society really is.

Posted by hyh | July 28, 2008 7:59 PM

Fannie Mae and Freddie Mac are now a monopoly. There is little to difference between the two entities. Together they provide more than 80% of the overall mortgages in this country. This is a problem in so many different ways. This is an anti-trust problem. They are now two big to fail.

The problem is that both Democrats and Republicans mostly Democrats have thought of owning a home as the key to the American Dream. They put in policies that allowed Fannie and Freddie to get too big.

Another problem was the general assumption that home prices will never fall. If I only had a dollar every time I heard that from 2005-2007 when people I know was getting homes that had mortgage payments that were more than 50% of their income.

The problem is home prices will continue to fall because incomes aren't rising and a country can't afford to have mortgages and rent payments more than 35% of your morthly income. 35% of gross income is the absolute max that should be spent on rent or the cost of owning a home.

Posted by Adam Freeman | July 29, 2008 2:29 AM

I thought one of the problems with "nationalizing" the GSEs, in whatever form, is that their debt then becomes federal debt, causing a significant increase in the total federal debt. That, in turn, could decrease the attractiveness of our Treasury bills, which leads to higher interest rates, more problems for the housing sector, as well as lower dollar value and more problems for American importers and consumers, who drive GDP.

Posted by bob | July 29, 2008 10:02 AM