Moving Closer To Taking The Correct Lesson From Fannie/Freddie?

Posted on | November 12, 2011 | 17 Comments

by Smitty

Via Instapundit, we see that Michael Bloomberg has not:

“We look forward to the rapid fulfillment of this commitment so that Countrywide can sign another record-breaking agreement with Fannie Mae,” Mozilo finished.
Mozilo’s almost 20-year-old quote is relevant again thanks to the uproar New York Mayor Michael Bloomberg caused last week when he criticized Occupy Wall Street’s view of the financial crisis.
Bloomberg said, “it was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp. … They were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will.”

No, Bloomberg, the correct lesson is that the Community Reinvestment Act was false, and not in keeping with the spirit of the Constitution. Only the states should ever be interacting with citizens concerning their housing. The federal government should, at most, set some high-level standards. Then, the federal government could perform a useful oversight function.

In other words, beside the moral hazard involved in giving too much power to DC, we also lose the vertical check of having somebody being a watchdog. And that’s all without trotting out the Hayekian argument about the failure of overly centralized planning.

That is the correct lesson of Fannie/Freddie: they don’t work, they were never founded to work, and real improvement will not commence until their graft-laden simulation of working is brought to a halt.

Meanwhile, one hopes that NYC is capable of electing a useful mayor one of these days.

More at Power Line including a mocking tune which I may get to, later.

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Comments

17 Responses to “Moving Closer To Taking The Correct Lesson From Fannie/Freddie?”

Jorge Emilio Emrys Landivar
November 12th, 2011 @ 11:36 pm

“The federal government should, at most, set some high-level standards. Then, the federal government could perform a useful oversight function.”

NO NO NO NO NO!
Thats the first step towards the federal government taking over. The only way to fix it is a wall of separation between government and economy.
Fannie And Freddie Have To Go « That Mr. G Guy's Blog
November 12th, 2011 @ 11:43 pm

[…] Smitty links Instapundit and gives a good reason for the demise of Fannie Mae and Freddie Mac. Neither entity is Constitutional. Mr. Smith corrects an assumption that mayor Micheal Bloomberg of New York City made; “We look forward to the rapid fulfillment of this commitment so that Countrywide can sign another record-breaking agreement with Fannie Mae,” Mozilo finished. Mozilo’s almost 20-year-old quote is relevant again thanks to the uproar New York Mayor Michael Bloomberg caused last week when he criticized Occupy Wall Street’s view of the financial crisis. Bloomberg said, “it was not the banks that created the mortgage crisis. It was, plain and simple, Congress, who forced everybody to go and give mortgages to people who were on the cusp. … They were the ones who pushed Fannie and Freddie to make a bunch of loans that were imprudent, if you will.” […]
BruceC
November 13th, 2011 @ 12:30 am

Personally, I like this mocking tune better: http://www.youtube.com/watch?v=-CT6HIDPbPc
Adjoran
November 13th, 2011 @ 2:18 am

There not only is no proper role for the federal government in setting mortgage credit standards, there is no proper role in guaranteeing any mortgage to which the federal government is not the mortgagee.

There was an argument to be made at the beginnings of suburban development after WII: the pent-up demand for housing after nearly 20 years of depression/recession/war, the returning veterans would all be new in their jobs and not qualified for the existing standards at the time. So there was a need and a noble purpose but, as usual when one does the wrong thing for the ‘right’ reasons, it all comes a-cropper.

But even diehards who believe in the idea have to admit that Fannie and Freddie are bleeding billions at a time we cannot afford to write check after check to cover their follies. We need to close them down in methodical manner (to minimize the losses still coming), and learn a lesson for once.
Joe
November 13th, 2011 @ 2:56 am

I do not mind the Feds subsidizing mortgages for veterans. Beyond that they should be out of the business.
jwallin
November 13th, 2011 @ 7:05 am

Ahhh, the pusillanimous pipsqueak strikes again.

It just shows that making money doesn’t mean you’re smart; just good at making money.

Hopefully they won’t let him slip under the term limits and NYC can get a mayor with some balls and smarts.
jwallin
November 13th, 2011 @ 7:07 am

And chris dodd and barney frank need to be indicted, sentenced to the same term that madoff got.
Bert Spence
November 13th, 2011 @ 8:54 am

Smitty, the Community Reinvestment Act, though heinously unconstitutional, was a drop in the bucket and as much symptom as cause in the recent bursting of the financial bubble. The cause was artificially cheap credit, courtesy of the Federal Reserve. Yes, the U.S. Government has foolishly steered people to houses via Fannie/Freddie, the mortgage interest deduction, and hundreds of other ill-conceived policies designed to tilt the scales toward the purchase of a house by people who should have spent a few more years saving up for a down payment, but none of those policies could have produced the bubble that burst in 2008 without the Fed’s handing money out to banks at artificially low rates. When money is cheaper than the market would cause it to be, people make bad decisions on all levels. What happened in 2008 manifested itself first in housing, but as we have seen, the rot was in all financial decision-making. The banks were drinking from a Fed fire hose. Had they attempted to “hold out” and not lend, their competitors would have swallowed them up. The whole purpose of a bank is to lend money for a higher rate than the money costs the bank. That’s what they do. Saying banks shouldn’t have lent is the same as saying there should be no banks.

So yes, your heart is in the right place, but everything that is wrong with our financial system is facilitated by central banking. Even an institution as irresponsible as Congress can do relatively little damage without a Fed to facilitate it.
Anonymous
November 13th, 2011 @ 9:17 am

“the Community Reinvestment Act, though heinously unconstitutional, was a drop in the bucket”

Bert, the problem with the CRA isn’t that you gave bad loans to some people, the real problem is the one that crops up every time the government designates Official Victim Groups and says that holding them to standards and laws is “discrimination”: If you can’t enforce the same rules for everyone, pretty soon you can’t enforce them for anyone.

What are you going to do? Have a stack of forms for Blacks only? Gays only? that have all those “discriminatory questions” like income level or employment history or credit history removed? Make the discrimination that blatant and you’ll get a majority revolt. So you have one stack of forms for everyone with those questions removed. Can’t ask them of anyone.

And what qualifies you for membership? I understand the “one drop” rule used to be acceptable for purposes of discrimination… And we don’t even have that standard for homosexuality. After all, married with children just means you were “in the closet”… which makes you more of a victim.

The same law for everyone is the only way to go.
Joe
November 13th, 2011 @ 9:51 am

Yes, Yes, YES!
Anonymous
November 13th, 2011 @ 10:02 am

And that same “law for everyone” got us into this mess – because Prime borrowers qualify for Sub-Prime loans, too.

Which means the law was bad.
DaveO
November 13th, 2011 @ 11:59 am

Smitty,

Before the US can learn the Terminal Learning Objective about the bursting of the housing bubble, there needs to be some Enabling Learning Objectives:

ELO 1. Justice and the laying of blame are not the same thing. There are people who are escaping accountability through their race, sexuality, and membership in Congress. Justice is truly blind, so if one wants justice, one must cast aside defenses based on DNA and choices.

ELO 2. Destroy idols of Progressive Virtue. The people who profited from promoting the housing bubble, the CRA, and who made profits from the market crash, are Idols of Virtue on the Progressive Left and Right.

ELO 3. Members of Congress regularly profit through practices that are illegal for everyone else. If insider trading is illegal, it must be illegal for everyone. Members of the US Congress outperform life-long professionals. Congress, through the Commerce Clause and ability to control regulation and law is in the business of picking winners and losers. Congress must do what the POTUS must do: put all investments in the hands of a professional, and have zero association/contact until his/her term of office is complete.
Adjoran
November 13th, 2011 @ 2:30 pm

Madoff’s victims handed him their money voluntarily. Their own greed and gullibility did them in.

Dodd and Frank forced every taxpayer to fund their scam to extract gold from our teeth and give it to the sort of deadbeat parasites who vote Democratic. They deserve to rot forever, and then be (mercifully) forgotten.
Adjoran
November 13th, 2011 @ 2:34 pm

The interest rate would not have created a bubble if the existing credit standards for mortgage lending had been left intact. Sure, qualified borrowers could buy a bit more house at a lower rate, but as long as the income and credit record standards were preserved, people would not have been able to buy more than they could afford – and have that excess purchasing guaranteed by the federal government.
Anonymous
November 13th, 2011 @ 4:06 pm

So crow’s cages it is.
W
November 13th, 2011 @ 5:36 pm

http://news.investors.com/Article/589858/201110311638/Housing-Crisis-Obama-Clinton-Subprime.htm
Bert Spence
November 13th, 2011 @ 6:15 pm

Wrong. Cheaper money means that borrowing increases at the margins. Every “bubble” the U.S. has ever experienced was fueled by credit expansion. Go read up on fractional reserve banking and the means by which the Fed injects funds into the system.

Ask yourself why credit standards were lowered. It’s not because bankers were angels before 2003 and suddenly discovered a brand new sin called “greed.” It’s because the cost of funds was cheap, which created an illusion of lowered risk, which fueled buying, which enabled originators to bet that increases in prices would take care of crummy loan-to-value ratios. The same cheap funds fueled the speculation that became the “originate it, securitize it, forget it” business model. There were buyers aplenty for the mortgage-backed securities because so much liquidity was pumped into the system and everyone was chasing yield.

None of that would have existed without Greenspan’s Fed pumping out the dollars.

The “dot com” bubble was the same story. Make money too cheap and people who shouldn’t borrow lots of it.

Let the market set interest rates and keep your central bank from creating money out of thin air and 2008 never happens.