Anyone who cares about the health of the US economy should despise the enactment of the Treasury's rescue plan for Fannie Mae and Freddie Mac, along with other measures to support the housing market. I confess that I took that sentence from the first sentence of Professor Lawrence Summer's essay in the Financial Times and changed one key word. I changed "welcome" to "despise."
Psst...hey buddy...wanna buy a mortgage?
It's distressing to note just how out of touch with reality the academic community usually is. They are often even more clueless than our politicians are. Professor Summers is no exception. In his argument that Congress' bailout of Fannie Mae and Freddie Mac is a good thing, he praised the government for its "decisive action." He clearly demonstrated his own, statist position when he wrote:
"There is no question that we need the GSEs to be highly active in support of the housing market and financial system in the months ahead. If the authorities can see a path to their being able to play such a role in a framework where it can honestly be said that their borrowing is based on confidence in their financial position rather than primarily on federal guarantees, then this is obviously the preferred alternative."
Then, in a moment of semi-lucidity, he followed this up with the following:
"If this preferred alternative is, as I fear, not realistic given the state of GSE finances, the government should use its new receivership power to protect taxpayers and the financial system. In the process, payments to stock holders, holders of preferred stock and probably subordinated debt holders would be wiped out, conserving cash for the benefit of taxpayers. The GSEs' borrowing costs would fall considerably, helping prospective homeowners.
"In this scenario, the government would operate the GSEs as public corporations for several years...."
Excuse me a moment while I go throw up. [.....barf.....] OK, I'm back.
I must admit I'm having trouble figuring out whether Summers is truly ignorant of the causes of the current crisis, collosally inept when it comes to logic, or if he just doesn't give a damn regardless. Any way you look at it, his argument refutes itself. In fact, it refutes itself so many different ways that it's difficult to know where to begin to count the self-contradictions. Rather than attempting to do that, I'll simply note a few of the obvious examples.
(1) He thinks that the government should use its new receivership power to protect taxpayers. How? The entire usurped (and unconstitutional by the way, not that anyone in government except Ron Paul cares about that little annoyance anymore) power is built on robbing the taxpayer, because there is no other way to bailout the two bohemoths. Even sending the nation deeper into debt robs the taxpayer. There is, in fact, no way not to rob the taxpayer with Congress's new powers.
(2) Summers thinks Congress should use these new powers to protect the financial system. Which financial system? Well, there's really only one. That's the system that the Federal Reserve runs. I doubt that Summers even realizes this fact, which would explain why he thinks that Congress can rescue itself from itself and from the Fed's actions. After all, it was the combination of Congressionally mandated housing laws combined with loose Fed policy combined with the creation of two publicly created financial behemoths (Fannie and Freddie) who have derivatised the mortgage industry into its current state of checkmate which has created this whole, monumental mess.
(3) He argues that wiping Fannie Mae's and Freddie Mac's stockholders, preferred stockholders, and subordinated debt holders (which has pretty much already happened) would conserve cash for the benefit of the taxpayers. Who is he kidding? The taxpayers are never going to get that cash (whatever is left of it) and he knows it.
(4) Here's a really good one. He argues, "The GSEs’ borrowing costs would fall considerably" as a result of (3) above. In a sane society, no one would ever invest money again in Fannie and Freddie. Unfortunately, we don't live in a sane society. The perception that Congress has given to investors, which Summers is counting on, is that the government is prepared to endlessly create money out of thin air in order to keep the whole jury-rigged Ponzi scheme afloat. Summers, apparently, is just fine with that. If he really understands what he's saying, then I can only conclude that he is a monster of Athenian proportions who loves the idea of America all going kaput together at the hands of the bankers. I guess Summers must have made the 2008 U.S. Olympic team in the BS tossing event.
(5) Next comes the piece de resistance. He thinks that the government is capable of managing Fannie and Freddie better than the private sector can. The basis of this assumption? He gives none. It's pure hot air, of course. The government has demonstrated time and time again that they are not to be trusted with running any enterprise, let alone the biggest legal and financial boondoggle in history which makes Enron look respectable by comparison. But that doesn't deter Summers.
Later in the article, he does at least acknowledge that, "A major concern is that receivership would endanger the financial health of the US by taking on to the federal government’s balance sheet all the liabilities of the GSEs." No kidding, although I think "endanger" is a bit mild. How about destroy? Or obliterate? Those verbs seem to be a bit more candid. Still, I have to agree that taking two humungous and virtually bankrupt private entities and putting them into the hands of the world's all-time champion of incompetence, mismanagement, waste, and bureaucracy is "a major concern," although calling it "sheer folly" would probably be a more accurate description.
©2008 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Sunday, July 27, 2008
Last modified: Sunday, July 27, 2008
The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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