Fiatch

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“Free Will: Financial Apocalypse Explained” with Will Wilkinson and Arnold Kling.
—hat tip to Wealth Is Not The Problem.

Watch this May 17, 2002 address on housing by President George W. Bush.  It’s a chilling clip (hat tip Barry Ritholtz).

• “It makes sense to help people pay that down payment.“  — Mr. President, it clearly does not.
• “Single Family Affordable Housing Tax Credit” — Mr. President, it isn’t affordable, it isn’t creditworthy, and please stop with tax credits and other damaging interventions.  They are incredibly expensive and futile, and they harm even those whom you intend to help.
• “There’s a lot of fine print on these forms, and it bothers people and makes them nervous.” — Good grief.
• “The federal government obviously has to play a very important role, and we will.” — Good grief, ii.
• “After all the real estate industry benefits when people are encouraged to buy homes…“  — Nonsense, Mr. President.  Utter nonsense.  Stop encouraging.  Let the market allocate resources.  It is better at it than you and your colleagues can ever be.
• “How to create a sustained commitment by the private sector…“  — Well, for one, Mr. President, it would help if the real estate market were free of disruptions, distortions, and interventions by the “mighty muscle” of the government.
• “We want to make sure to expand the capital available.” Printing presses, go!
  
• “a more secure America” — Not by a damn sight.
  
• “I call it America’s Home Ownership Challenge.”  — Ironic, much?
• “We use the mighty muscle of the federal government to encourage people to own their own homes” — For what purpose will you use this muscle now?  What is your command, sir?
• “Each of us has a responsibility to put something greater than ourselves, to promote something greater than ourselves.” — I agree in principle, Mr. President, but can you not let me decide?  You seek to use this right principle to acquire more power for yourself so you can direct the activities of private individuals by your muscle and command.  That’s a bad idea, sir.  Look around and admit what you have created.

President Bush, a Republican, secured a $440 billion commitment from the GSEs, including Fannie Mae and Freddie Mac, to manipulate the housing market.  It took this Flood Projection Team but six years to drown the whole system.

Unsurprisingly and unfortunately, the levees didn’t hold, partially because other projects flooded out yet more stores of value which private citizens had built.  Subprime lending washed out and started a cascading series of issues.  We will not have our heads above water for years.

We do not have a two-party system.  It’s one party. They made this flood, and they are using it to accumulate even more power.

What store of value is safe?

What if the ideas of the Austrian economists are correct?  What happens next?

“Pressured to Take on Risk, Fannie Hit a Tipping Point” via the NYT explains much more about Fannie’s demise and offers “an inside account of the critical juncture when Fannie Mae’s new chief executive, under pressure from Wall Street firms, Congress and company shareholders, took additional risks that pushed his company, and, in turn, a large part of the nation’s financial health, to the brink.”

Read the whole thing. Nuggets include:

• Between 2005 and 2008, Fannie purchased or guaranteed $311 billion in loans to risky borrowers — more than five times as much as in all its earlier years combined, according to company filings and industry data.
• When Mr. Mudd arrived at Fannie eight years ago, it was beginning a dramatic expansion that, at its peak, had it buying 40 percent of all domestic mortgages.
• …the company announced in 2000 that it would buy $2 trillion in loans from low-income, minority and risky borrowers by 2010.
• All this helped supercharge Fannie’s stock price and rewarded top executives with tens of millions of dollars. Mr. Raines received about $90 million between 1998 and 2004, while Mr. Howard was paid about $30.8 million. Mr. Mudd had already collected more than $10 million during his four years at Fannie, according to regulators.
• Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 billion to $540 billion, according to Inside Mortgage Finance, a trade publication. Communities were inundated with billboards and fliers from subprime companies offering to help almost anyone buy a home.
• Shortly after he became chief executive, Mr. Mudd traveled to the California offices of Angelo R. Mozilo, the head of Countrywide Financial, then the nation’s largest mortgage lender. Fannie had a longstanding and lucrative relationship with Countrywide, which sold more loans to Fannie than anyone else. But at that meeting, Mr. Mozilo, a butcher’s son who had almost single-handedly built Countrywide into a financial powerhouse, threatened to upend their partnership unless Fannie started buying Countrywide’s riskier loans.
• Capitol Hill bore down on Mr. Mudd as well. The same year he took the top position, regulators sharply increased Fannie’s affordable-housing goals. Democratic lawmakers demanded that the company buy more loans that had been made to low-income and minority homebuyers.
• Between 2005 and 2007, the company’s acquisitions of mortgages with down payments of less than 10 percent almost tripled. As the market for risky loans soared to $1 trillion, Fannie expanded in white-hot real estate areas like California and Florida.

And if you are still telling yourself that government intervention helps, consider:

Had Fannie been a private entity, its comeuppance might have happened a year ago. But the White House, Wall Street and Capitol Hill were more concerned about the trillions of dollars in other loans that were poisoning financial institutions and banks.

Lawmakers, particularly Democrats, leaned on Fannie and Freddie to buy and hold those troubled debts, hoping that removing them from the system would help the economy recover. The companies, eager to regain market share and buy what they thought were undervalued loans, rushed to comply.

The White House also pitched in. James B. Lockhart, the chief regulator of Fannie and Freddie, adjusted the companies’ lending standards so they could purchase as much as $40 billion in new subprime loans. Some in Congress praised the move.

“I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy,” the chairman of the House Financial Services Committee, Barney Frank, Democrat of Massachusetts, said at the time. “That’s why I’ve supported them all these years — so that they can help at a time like this.”

This disaster results from a crisis of poltical economy.  Read this piece again.

[photo source]

Please note this September 2003 hearing.  Congressman Barney Frank’s opening statement begins just past the four-minute mark and includes:

I want to begin by saying that I am glad to consider the legislation, but I do not think we are facing any kind of a crisis. That is, in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis. We have recently had an accounting problem with Freddie Mac that led to people being dismissed, as appears to be appropriate. I do not think at this point there is a problem with a threat to the Treasury.

I must say we have an interesting example of self-fulfilling prophecy. Some of the critics of Fannie Mae and Freddie Mac say that the problem is that the Federal Government is obligated to bail out people who might lose money in connection with them. I do not believe that we have any such obligation. And as I said, it is a self-fulfilling prophecy by some people.

So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickel—nor anybody else in the Federal Government. And if investors take some comfort and want to lend them a little money and less interest rates because they like this set of affiliations, good, because housing will benefit. But 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.

Now, we have got a system that I think has worked very well to help housing. The high cost of housing is one of the great social problems of this country. I would rank it second to the inadequacy of our health delivery system as a problem that afflicts many, many Americans. We have gotten recent reports about the difficulty here.

Fannie Mae and Freddie Mac have played a very useful role in helping make housing more affordable, both in general through leveraging the mortgage market, and in particular, they have 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, and that is what I am concerned about here. I believe that we, as the Federal Government, have probably done too little rather than too much to push them to meet the goals of affordable housing and to set reasonable goals. I worry frankly that there is a tension here.

The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disastrous scenarios. And even if there were a problem, the Federal Government doesn’t bail them out. But the more pressure there is there, then the less I think we see in terms of affordable housing.

Seriously?

Catch a glimpse of vast and deep and intractable and banal misallocation, waste, abuse, and theft.

Fannie and Freddie never had a chance, by corrupt design.  It should come as no surprise that abject corruption by individuals accompanied the inevitable enterprise collapse.

Socialism is doomed to fail and fail miserably.  Party names do not matter.  The current US Congress now prepares to hoist a bipartisan monstrous socialist advance upon the US.  We will inherit the consequences even as we vainly attempt to evade the consequences of prior destruction.

Study F.A. Hayek.

Study Ludwig Von Mises.

Study Milton Friedman.

Begin now.

The financial meltdown the economists of the Austrian School predicted has arrived.

We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market’s attempt to re-establish rational pricing of houses and other assets.

Last night the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over – not just for the past several days, but for years and even decades.

Still, at least a few observations are necessary.

The president assures us that his administration “is working with Congress to address the root cause behind much of the instability in our markets.” Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?

We are told that “low interest rates” led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments – investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.

Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or “wildcat capitalism” (as if we actually have a pure free market!).

Speaking about Fannie Mae and Freddie Mac, the president said: “Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”

Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the “many” who “believed they were guaranteed by the federal government” were in fact correct?

Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary “the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet.” Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.

It’s the same destructive strategy that government tried during the Great Depression: prop up prices all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.

The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating which one is the bigger celebrity, or whatever it is that occupies their attention these days.

F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day – and which are being proposed, just as destructively, in our own:

Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion….

To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end…. It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.

The only thing we learn from history, I am afraid, is that we do not learn from history.

The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?

Oh, and did you notice that the bailout is now being called a “rescue plan”? I guess “bailout” wasn’t sitting too well with the American people.

The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.

I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects – the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.

H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.

[source]

• Excessive leverage
• Government intervention in markets
• Corruption under the watchful eye of regulators
• Doomed socialist boondoggles

All enabled by — if not inevitable due to — fiat currency.

And you want to blame capitalism for this mess?  Really?  Please.

Get. Real.

Check “Fannie Mae Eases Credit to Aid Mortgage Lending” from the NYT, September 30, 1999.

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets — including the New York metropolitan region — will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

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.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

”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. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But 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.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

[photo source]

Get comfortable. (wa wa)

This crisis isn’t going anywhere thanks to new interventions that will only prolong the agony by delaying determination of value and keeping private interests from participating. For example:

Under new rules that take effect in October, the FHA will be able to insure an additional $300 billion of troubled mortgages. Another federal program, launched late last year, lets homeowners refinance high-cost subprime loans into FHA-backed mortgages with lower fixed rates. That new rule authorizes the FHA to refinance up to 500,000 loans.

The worry is that the FHA will stumble under the extra weight. By some estimates, the new initiatives could double the agency’s loan volume. Already, its share of the housing market has ballooned to more than 14% in 2008. And many of the new loans may be riskier than the ones already on the FHA’s books. “If you shuffle around who owns these loans, nothing is going to change,” says Robert A. Eisenbeis, a retired director of research at the Atlanta Federal Reserve and an economist for money manager Cumberland Advisors. “We’re going to end up looking at losses that are going to make the [savings and loan] crisis look like peanuts.”

America and many other nations have failed to recognize the importance and vital role of markets.   As a result, governments, including in the US, have socialized and centralized economies.  We are now bearing the unavoidable consequences.

This crash has only just begun.  Prior leftist design made these scenarios a foregone conclusion.  Postwar peace dividends; the gradual globalization of free trade; successive demographic waves (e.g. the baby boom, women entering the workforce); and a long-term debt binge after abandoning the last of any gold standard have delayed the inevitable.  Myriad socialist programs and government interventions have encouraged malinvestment and created unsupportable entitlements, which have together put the entire US in hock.

Unfortunately, it is only going to get worse because bureaucrats and officials from both parties have no idea what is happening or why — Ron Paul and Jim Bunning excepted, along with possibly a few others.  As a result, politicians and regulators are leading (so-called) us in the wrong direction, i.e. toward more and bigger trouble.

Jim Rogers engaged in vigorous debate with CNBC analysts in mid-July.  This clip illustrates how little America realizes, much less respects, the inevitable disaster that is socialism or the benefits of markets over centralization.

Even paid-professional financial commentators on CNBC cannot see the wall that we have crashed into — even though we’ve been barrelling at it for decades.

Watch the whole thing in the video above.  Highlights include:

Bertha Coombs from CNBC around 1:30: “Jim, what alternative is there to coming in and propping [Fannie Mae and Freddie Mac] up?  They play a critical role in the mortgage market.  If you don’t have them buying up mortgages, that’s just going to keep our housing that much worse…”

After Jim Rogers challenges her assumptions and assessment, Ms. Coombs continues:

“What do we do?  Let them fail?  And then what?  What happens to mortgages?  Who buys them up?”

This cluelessness is so totally straight out of some Atlas Shrugged nightmare.

If mortgages in America represent a sound investment, all manner of private interests will participate.  If mortgages in America do not represent a sound investment, why in hell do these mortgages exist and what on earth is our government doing buying them?  This insanity represents professional financial commentary in America today.  Unbelievable.

Ms. Coombs of CNBC later continues: “…there is an argument to be made that some of this is also a failure of confidence, and a lot of folks, there are people who would say there are short sellers like you that are talking down these companies and out there saying that they are insolvent when in fact they have reserves that are above their mandates.”

Jim Rogers: “Oh, please, Bertha, I would urge you to pull out their balance sheet.  If you think Fannie Mae or Freddie Mac are solvent, then I would urge you to get a balance sheet and an examiner, to get somebody who can explain this to you.  Fannie Mae is not solvent.  Even Poole of the Federal Reserve has acknowledged that they aren’t solvent.  If you are blaming all this on short sellers, then you should have another job.”

No diggity, Jim.

Did you see the madness in her comments?  Regarding the financial state of Fannie and Freddie, she appeals not to fundamental facts or finance but to government mandates, i.e. regulation.  She is calmly and politely stark, raving crazy.

She further mentions the tactic of blaming short sellers.  She provides no backup whatsoever.  Jim’s response is ideal.

I will say, though, that she is right that folks like Jim Rogers have eroded confidence. For instance, I no longer believe in the confidence game aka con that the Fed, Treasury, Fannie, Freddie, and all their backers (folks, on your left, you will see Congressman Barney Frank counting all his new coin) have been running.  It’s a shell game, and we’re the suckers.

Let’s repeat a series of Ms. Coomb’s questions: “What do we do?  Let them fail?  And then what?  What happens to mortgages?  Who buys them up?”

She, like our current policymakers and bureaucrats, believes in socialism.  This is not mere opinion, conjecture, hyperbole, or device.  It’s definitional.

She is a socialist.  She actually believes that if Fannie and Freddie weren’t buying these homes, that is, if the US government were not buying mortgages and nationalizing housing, then we’d fall apart.

In a way, I have more respect for the lobbyists and influence peddlers who just want to get paid.  At least they aren’t this stupid.

She is 100% wrong.  In fact, the reverse of her claims is true.  It is because the US government has been buying homes via the ambiguity of Fannie and Freddie (and thousands of other policies and programs) that we have this mess.  And no one can see this fact even as we slam into this very wall.

Jim Rogers is totally right.  She is totally wrong.  That we now have CNBC professionals spouting socialism is pretty terrifying.

Watch as Secretary Paulson tries to run for cover.

He correctly mentions that Fannie and Freddie’s terminal defects predate his Treasury post.  He also rightly asserts that today and Lehman differ from March and Bear Stearns.  That said, he should have left Bear Stearns alone in March.  That bailout was futile and ill-conceived.

In addition, he mistakenly labels the housing correction as “the root of the problem.”  That’s politically convenient but not true.  The inevitable and ongoing housing correction is the solution to this problem.

(i.) Home prices in the US have been bid up artificially high and (ii.) too many homes have been built due to (a.) Fannie, Freddie, the Community Reinvestment Act, and hundreds if not thousands of other policy initiatives, and (b.) the Fed leaving rates too low for too long.

We can’t and won’t get out of this morass until the market can clear housing inventory.  To do so, prices must fall, and the government should get the hell out of the way.

“The regulator of Fannie Mae and Freddie Mac said Sunday that it won’t allow the companies to make “golden parachute” severance payments to the mortgage companies’ ousted chief executive officers.”

“Regulator Plans to Bar Big Severance” via the WSJ.  The photo is not directly related to this story.

To these figures, we must now add the obligations associated with Fannie, Freddie, and all the the mortgage-backed securities that the Department of Treasury has been authorized to buy directly.  Fannie and Freddie already hold or guarantee more than five trillion in mortgages.