| WIKI | FAQ | Tech FAQ | |
 http://csua.com/feed/ | |
| ||||||
| 5/24 |
| 2009/2/11-18 [Finance/Banking, Finance/Investment] UID:52555 Activity:high |
2/10 Why tax cuts are a bad way to stimulate demand in a deflationary
environment:
http://tinyurl.com/ccatun
(Freakonomics Blog at NYT)
\_ Oh sure, you can't trust people with their own money.
http://www.youtube.com/watch?v=zISKoQegbxM
\_ No, you can't, when the collective interest is
diametrically opposed to the individual's interest.
We, collectively, need the economy stimulated.
However, we, individually, don't want to spend our
However, we, individually, want to save our money
money to maximize our personal financial security.
So, right now, you can't trust people with their
own money.
\_ Is this why the fed has racked up debts that work out to
over $30,000 per capita?
\_ How large are the debts that the private sector has
racked up?
\_ People know what they need and don't. We've been living in a
mode where people spend way beyond their capacity. Retreating
from that is normal. Deflation is good. We have tons of
immigrants and an inefficient culture of buying tons of
cheap crap.
"Deficient aggregate demand" isn't a problem. We still have
a huge trade imbalance so there are plenty of jobs we could
theoretically be doing instead of importing all that shit.
But the only way that would happen is if we let conditions
move towards equilibrium instead of borrowing trillions to
prop up the status quo.
\_ You almost make some sense. Good thing you aren't running
the Republican party or I'd have to vote for you.
\_ Do you think that people knew what they needed and what
they didn't need when they decided to leverage up buying
McMansions, flipping houses and buying SUVs? How about when
they bought all those exotic financial instruments which
bet on the housing bubble? Do you know what a deflationary
trap is? What you are advocating would put us in one,
the same as Japan post-bubble, and would give us our
own "lost decade" or two.
\_ People did that because it was what makes sense to do
given abundant cheap credit. The government's policies
steered the market towards cheap imports and housing
instead of real industry -- not only our direct
policies but how we allowed e.g. China to manipulate our
own economy. See:
http://blogs.cfr.org/setser/2009/02/02/it-wasnt-just-the-market/#more-4618
Of course long-term deflation is not good. But if it
wants to happen there's no point going around trying to
ignore the laws of gravity. We should look for ways to
cushion the fall and set things up for long term success.
The previous economy (dot com then crazy mortgage bubble)
was based on a tremendous amount of imaginary wealth.
To keep on pretending just prolongs and exacerbates.
The ideas you're talking about is the thinking that lead
us to where we are.
\_ No, it was a deliberate decision by the GOP to
deregulate the financial sector which led to the blow-
up in available credit, more than anything. There were
certainly other contributing factors, but that was
number one. To lower the Debt/GDP ratio, you can try
to lower debt or raise GDP. Your plan would try and
lower debt, but probably lower GDP even more - that
is what has happened in the past when debt bubbles
have been allowed to pop without any attempt to
clean up the mess afterwards. There is a chance that
by reallocating capital to more effective uses, we can
grow GDP and reduce overall debt that way. Most of
the increase in govt debt recently has just been a
shift from private to public hands, so has not
increased the overall debt burden to the US economy.
This is not guaranteed of course, a lot of it depends
on how good a job govt does in allocating capital to
productive uses. It is hard to imagine that they would
do a worse job than the private sector has over the
last decade, but anything is possible.
\- you can blame the GOP for some crazy tax policies
gutting enforcement funding or "capturing"
regulatory agencies and most of deregulation, but
there is a lot of blame to go around on dereg
and mkt fundamentalism. i'd be ok chaining
robert rubin and phil gramm together and sending
them off into interstellar space.
\_ Please see the Commodity Futures Modernization
Act of 2000.
\_ Even given the deregulated system,
there were clear lapses on the part of the
regulatory systems that did still exist. And
failures on the part of private regulators like
S&P. I believe part of that is simply a lack
of competition -- the need for government
oversight is directly related to market health.
Markets don't know what's productive, they just
tend to maximize utility in terms of profit. If
the environment is skewed the result is skewed.
It's like when "kind" people put out food for
animals; the animals will base their "economy" on
maximizing this free benefit. They don't
understand why there is free food, so they can't
understand that it might go away, or that the
humans might round them up and gas them.
Low interest rates, perpetual borrowing, and
China's market manipulations are our free food.
Even now China keeps investing in overcapacity and
trade surplus.
The deregulated financial industry made mistakes,
but basically it was drunk on the free shit.
Cheap credit was influenced by the trade deficit.
The Fed also maintained relatively very low
interest rates even while the housing bubble was
growing insanely fast. Greenspan denied that there
was a bubble. The government was basically telling
people that housing was the place to be.
\_ Look, you ideological nitwit; the housing bubble
is *not* the cause of our financial crisis.
\_ I rather think it is. If housing recovers
then all of these problems instantly go
away. Loose credit and low interest rates
combined with fraudulent mortgage lending
practices and dishonest borrowers are at
the heart of the problem. If you want to
know where most of the $$$ went, it went to
anyone who sold a property in the last 5
years that they had owned more than 5
years prior. Some of it when to speculators
and some of it went to people like you
and me whose house value doubled in a few
years. When salaries and real estate prices
match more closely then this will all blow
over but not until then. Leverage just
made things worse by wiping out capital,
but those speculators had a good run prior to
that so some should weather this. Some won't.
C'est la vie.
\_ We have had credit bubbles that did not
involve housing and we have had housing
cycles (bubbles?) that did not bring down
the financial sector. Unregulated and
overly risky speculation is what brought
down the financial sector, mostly the IBs
and hedge funds leveraging 30:1 on their
bets.
the financial sector.
\_ S&L crisis?
This isn't the first time Citi has
borrowed from the gov't either.
Was 1991 the last time?
This crisis is more severe because
the bubble was bigger, partly
because interest rates were lower
and other instruments were
underperforming or viewed as
risky. That's all. CA has had housing
bubbles that popped, but this is new
to most of the country.
Financial institutions leveraging themselves
ridiculously is the cause of our financial
crisis. Oh, if only the government didn't
exist, the invisible hand would have made sure
that the banks acted safely!
Here's a news flash: The financial crisis
*IS* THE FUCKING INVISIBLE HAND. The free
market is perfectly happy to drive off a cliff
and destroy a society. Government's job is
to make sure that doesn't happen. -tom
\_ Leveraging wasn't THE cause; misclassifying
risk was the cause, and is directly
related to the housing bubble. And the
mother of all the leveraging is the fed's
low interest rates.
The financial crisis is not the invisible
hand because government was riding
shotgun the entire way. Or more accurately,
the government was building a bridge to
the promised land out from the cliff, but
actually it went into thin air.
In any case you are arguing a strawman: I
am not arguing that gov't regulation is
unnecessary. I'm saying it didn't do its
job.
\_ Yeah, whatever. How about this: Could
you describe a possible scenario where
the free market, by itself, could cause
a financial crisis? Or is that
impossible? -tom
\_ Obviously yes, with banks: bank runs.
Although modern banks are completely
married to the government via the
central bank, and via the laws that
allow them to create money and lend
money that they simultaneously owe
to their depositors. That's not
really the free market; it's inherently
unstable, and supposedly the govt is
managing this in order to be able to
easily stimulate the economy.
It is theoretically possible to have
banking which is not based on the
current scheme.
http://mises.org/Books/mysteryofbanking.pdf
You can't honestly have a free market
without a hard currency and a situation
where actors are held accountable for
their dealings.
A market run on an arbitrary government
fiat currency is inherently not free.
If banks were required to lend money
out of their own capital instead of
their customers, or else enter specific
contracts with customers to lend their
money, you could not have bank runs.
\_ Go sell it at Top Dog. -tom
\_ The model of modern corporations
is too conducive to disaster.
Responsibility is abdicated onto
a non-person legal entity, and
management transfers between
speculators who individually
do not have full understanding
of the business, but neither
stand very much to lose. The
executives and employees stand
to profit greatly from short
term schemes which are measured
by quarterly results.
Then you have the abomination of
"government sponsored corporations"
like
http://en.wikipedia.org/wiki/Fannie_mae
How can you say that the fin.
crisis is not directly related
to the actions of this agency
and the govt that created and
controlled it?
\_ Fannie Mae was a drop in the
bucket (and late) compared to
the total amount of CDOs
written. You should have
stopped at "bank runs have
happened long before there
was government regulation of
banks." Tell us how Tulip
Mania was big ole' gubmints
fault.
\_ Fraud and speculation are
not limited to the govt,
no, but the govt allows
for a special depth of
scope. Nothing's wrong
with a periodic recession.
But the govt banking scheme
creates vast money supply
variances which is what
creates a crisis.
\_ Prove it.
"Whether the U.S. had a central bank or not, the banks were _/
assured that if they inflated together and then got in trouble,
government would bail them out and permit them to suspend
specie payments for years. Such general suspensions of specie
payments occurred in 1819, 1837, 1839, and 1857..."
US banks are on the government's credit teat, and mommy government
always saves them, or at least the vast majority of them. And it
lets them multiply credit exponentially.
There's no real benefit to all that credit. It just inflates prices
and gives the fed. government a backdoor tax method.
Here, listen to FDR trying to explain away banking fraud.
http://www.fdic.gov/about/history/FDR_Fireside_Chat_Banking_Situation_03-12-33.mp3
Money as debt.
http://video.google.com/videoplay?docid=-9050474362583451279
Mystery of Banking
http://mises.org/Books/mysteryofbanking.pdf
\_ that's not proof of anything; it's pure assertion. And it very
specifically does not address the question, which is whether
a crisis can be created without government intervention. (Hint:
it is completely obvious that a crisis can be created without
government intervention.) -tom
\_ I don't need to prove anything, I'm not your slave and your
question isn't "the" question. Hint: all the major crises
in US history were entangled with the government. Your Tulip
example was not a crisis and is anyway half legend.
You're going around calling people idiots making assertions
but demanding that others "prove" things (hint: no economic
theories have ever been "proven"). But you have the status
quo mainstream theories which you accept as gospel even though
repeatedly they have failed to prevent massive crises. I
don't claim that you can't have economic problems, that's not
a relevant question; an alternative system does not have to
involve 100% protection from recession for example; in fact
it's likely that recessions are necessary for healthy economy.
Only if some fail is competition meaningful.
\_ I didn't mention tulips. "All the major crises in US
history were entangled with the government" is tautalogical;
the US has a government that ideological morons like you
blame for everything. There is no scenario under which
you would claim the government was not involved, therefore,
the government is always involved, therefore, the goverment
is bad. QED. Or not. -tom
\_ How ironic that you blame government response to financial crises
as being responsible for creating these crises. Do you blame the
fire department for fires, too?
\_ If you weren't an idiot, you'd realize that's not what I said. |
| 5/24 |
|
| tinyurl.com/ccatun -> freakonomics.blogs.nytimes.com/2009/02/10/tax-cuts-vs-government-spending/ Gauti Eggertsson argues that the risk of deflation should tilt the balance to government spending. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. a big if), you might think that either approach stimulates aggregate demand in roughly equal measure. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation's productive capacity means that a tax-cut-based stimulus doesn't do as much to narrow the gap between output and what we can produce. Under normal circumstances, this doesn't present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson's concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there's the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire. In fact, Eggertsson reckons there's a chance that tax cuts could even deepen the recession. Unfortunately the historical record can't tell us: there's never been an episode in which we've tried reducing taxes when interest rates were this low. When we're in uncharted waters, we've got nothing but economic theory to guide us. And the theory says it's safer to stick to a spending-based stimulus plan. Link How about a $2500 stimulus check per household which has to be used within a month or it disappears. This will work to help recapitalize banks and lower household debt while also encouraging spending. While doing this the govt should continue to purchase MBS and then lower the principal amount on those who are underwater (rather than just the interest rate). Then the major banks should continue to pay out bonuses but rather than cash and stock they should pay them out in these toxic assets. This will further help to get these assets off the books and will attract top talent to banks who have realistic valuations on their books. Link If the problem is jobs-and everyone seems to agree that in a consumer based economy such as ours, jobs is the main problem in a massive downturn-then the solution needs to involve creating jobs. The problem with America is we don't produce much anymore. Thus, giving people tax breaks and extra income will only put more money over seas, via the trade deficit. In other words, we'll just take our extra money and buy stuff from China. The best solution is to create jobs here by building things that we can use for decades. The best thing we could build we be a high-speed train system. Such a system would create thousands, maybe millions, of jobs and make us more fuel effecient. Link The problem with assuming people will spend any extra money they come into (tax credits or refunds or whatever) is that the government has already cried wolf on this. We were given tax credits last year, spent them, and now we're in a worse spot than we were before. Fair or not, intelligent or not, we're just going to save whatever money we get to save ourselves. Increasing government spending to over $31,000 for every man, woman, and child in the US? I *might* be able to stomach this stupid stimulus plan *if* we had ANY inkling of how to pay it off. When you're in a debt hole this big, the first and most important concept is to stop digging. With the money supply being expanded as fast as the printing presses can churn out dollars for this spending spree Congress is about to take us on, we're on course for Weimar-like currency value. Link The bigger problem is hyper-inflation in the out years. It will be like we had in the late 70s early 80s and worse. The best thing the government can do is get out of the way and stop meddling. Government intervention is only needed to stop catastrophic failures, such as banking institutions. Let the car companies go bankrupt if they cannot make it in the market place. If we had government bailouts in the past, we would still be producing carts for horses. Link Those insisting on tax cuts with religious zeal do not accept analysis in a neo-Keynsian framework. They also seem unable or unwilling to accept what "deflation" means. Link How about we quit assuming that the economy can be rescued? Maybe it's just a question of crashing, and the question is for how long, and how much deflation will occur? Might giving the money back to taxpayers to save, so they have some chance of riding out the mess, be the best thing to do with it, rather than have the government dig a deeper debt-hole for our kids? Link "We were given tax credits last year, spent them, and now we're in a worse spot than we were before." Thats like saying last year I threw a rock and it started to rain. "Fair or not, intelligent or not, we're just going to save whatever money we get to save ourselves." Some will do this, but others will need to spend the money to pay bills, such as morgage. I'm guessing that most people will not put it under their mattress. What does not go towards bills or the matress will go into banks or other investments. The real problem is what will happen when the banks get the money, will they keep it or start to make loans? Link I'm just not clear why a tax refund isn't the obvious solution. I would much rather decide where to spend my money than let my congressional rep do it-even assuming they weren't crooks, I would suggest that my spending is more likely to improve the economy than an investment in some silly white elephant project. You can eliminate the "perverse incentive" of encouraging work by making the cut retroactive: you get a refund off your 2008 taxes but are on your own for 2009. Likewise, there's no reason to choose a regressive refund-that's just a straw man. A one time, short term, "must be spent by May 1'' refund is a far better idea than a 2 year stimulus package loaded down with pork. Link "Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply." Isn't the whole point of the stimulus to make working more attractive today and to increase the labor supply? In fact, the way out of this (in my view) is to substantially reduce cost of investing (ie, capital gains and double-taxation of dividends). No need for $400/$800 billion of spending we can't pay off. No need to worry about wasteful government spending and corruption in the allocation of billions of dollars. It's a shame that actually fixing the problem is not in any politician's interest. Link What the Rupublicans don't understand or refuse to admit, is that the indescriminate use of tax cuts have created this problem. When the economy is average, they put money in the hands of those who won't spend it so there is no reason to invest. In bad times, it just allows these same types to cut and run as easily as possible. Remember, even with the stock market down , the beneficiaries of the Reagan tax cuts were into the market when the Dow was 1000 and still have a lot of speculative profits to evade taxes on. They've paid the Republicans a lot of money to get these breaks. What is needed is a new tax regimin that gives the breaks to those that make REAL investments. The speculators need (and must) be hammered much harder than they are currently. Since most wealthy Americans are 2nd, 3rd generation wealth or even further down the food chain, they are hopeless in making real investments. Link Brian @16: Perhaps you are capable of using your tax cut to repair crumbling bridges and school buildings, but most of us aren't. Unless you simply consider iterms such as I-35 over the Mississippi River "white elephants." how hard can it be to find a hundred million dollars that's maybe not the wisest possible spending? That's what the right-wing t... |
| www.youtube.com/watch?v=zISKoQegbxM Marked as spam Reply Actually the military was built by the Democratic Congress under Reagan. Reagan didn't have the power to fund the military under a Democratic Senate and House . Only congress has the power to create a budget, so no, Reagan didn't do squat. Marked as spam Reply @bnemesis And yet Clinton's tax hikes did not savagely murder the dotcom boom/economic boom like all you idiot conservatives said it would. Take a quick look athe the 16 countries in the world that are wealthier than the USA (a historic low for America, something else we can thank you dipshit republicans for) none of them are economically conservative. Your economic ideology is financially as well as intellectually bankrupt. Marked as spam Reply Every time you're losing an argument you try to weasel your way out into a winning one. We're in this mess because of Republicans and the verdict has been passed by the American people in the last wo elections: Republican suck. Why don't you shut your trap now and watch President Obama clean up your mess, ya little whiner. Yeah and the numbers tell me republicans have a horrible economic record and the economy grew faster under Clinton than any republican since Harding. Of course not as fast as the likes of FDR, Johnson, Truman and others. have never used anyother So called goverment services and MY gas taxes PAID for those roads as well as the maintance. Tim McVeigh you should hope not otherwise I would be blowing up fed buildings. Marked as spam Reply What a tax cut will really do is.... helps the working people (middle and poor) buy necessities. With the dollar losing its value, a tax cut will help adjust for the price adjust of the dollar value to goods. That way, the working class does not have to cut buying necessities. The tax cut will help the working class stay at the same buying power before the dollar losing its value. Cutting taxes means cutting SPENDING, and govt will NEVER cut spending; Marked as spam Reply During Clinton, the budget surplus was created by the dotcom boom. The dotcom boom cause the govt to receive extra social securities money. The only reason why the surplus existed, because the govt had not figured out where to SPEND that extra supply of money. |
| blogs.cfr.org/setser/2009/02/02/it-wasnt-just-the-market/#more-4618 Atom 03 The Council on Foreign Relations has launched its very first weblog, The Candidates and the World, which aims to track the campaign through the prism of foreign policy, trade, international economics, and national and homeland security issues out on the stump on a daily basis. It appears that you are using either an older, classic Web browser or a hand-held device that allows you to view our content but may not work with every feature of our site. James Saft of Reuters worries that the crisis will lead to a shift away from the "Davos consensus," especially as the market's power had pulled so many out of poverty. "the stuff underlying the Davos consensus really was pretty good at doing lots of things, not least raising living standards in huge swathes of the developing world. States aren't traditionally all that great at allocating resources either" Reasonable point. But the narrative of the past six years isn't really one defined solely by the retreat of the state and a greater role for markets in allocating resources in the developing world. In both China and many fast-growing (until recently) oil-exporters, the state played an active role in guiding investment decisions. It thus was helping to determine how resources were allocated across sectors. Nick Lardy and Morris Goldstein pointed out a while ago, is financed domestically. And a lot of that investment is financed by the retained earnings of state firms or by loans from state banks. Perhaps all of these investments were done on a purely commercial basis, but there was certainly scope for the state to guide the allocation of resources. And a lot of "private" investment in Gulf came from banks and firms that were either owned by the state or by the "palace." A host of firms borrowed not on the basis of the strength of their own balance sheet but on the perception that they were too close to the state to fail. Dubai is often presented as a model of free-wheeling capitalism. Simeon Kerr and Roula Kalaf of the FT: "Dubai's sprawling business empire spans government institutions and private companies owned directly by Sheikh Mohammed but acting as quasi-government bodies. The ruler has instituted a culture of competition among state-backed companies and insisted they run themselves as private sector entities. In their quest to satisfy his ambitions, the business groups have come to rely heavily on debt - leveraging myriad commercial ventures, from domestic property developments to international acquisitions. Along the way, Dubai's finances have become complicated and the line between ruler and government assets blurred. It turns out that state backed companies weren't borrowing as private sector entities -- or at least no one who was lending them money thought so. They were able to borrow so much largely because of their state backing. And now, given Dubai, Inc's cash flow troubles, Dubai, Inc may soon morph into Abu Dhabi, Inc. Pegging to the dollar as the dollar fell from 2002 to early 2005 produced a large real depreciation in the RMB The RMB then rose v the dollar, but never by enough to fully offset the dollar's fall. The BIS estimates that China's real exchange rate was weaker at the end of 2007 than at the end of 2000 -- even though China's exports grew by a factor of five during this period. The nominal and real depreciation of the RMB encouraged foreign firms to set up shop in China and encouraged domestic investment in the export sector; it is hard for me to believe that as much would have been invested in China's export sector if China had had a different exchange rate regime. China's policies also influenced -- in all probability -- the global allocation of resources. Before the recent crisis, remember, private capital wanted to finance current account deficits in the emerging world, not the current account deficit associated with the US household sector's borrowing need. By holding US interest rates down and the dollar up, China's policies discouraged investment in tradables production in the US while encouraging investment in the interest-rate sensitive sectors that weren't competing with Chinese production. This isn't too say that the US didn't already have a slew of policies in place to encourage investment in housing. It did -- from the Agencies to ability to deduct mortgage interest from tax payments. But the surge in demand for US bonds from the world's central banks reinforced those policies. Larry Lindsey argued -- I think correctly -- that China's policy of spending huge sums - to keep its exchange rate from rising, China often had to spend 15% or so of its GDP buying foreign assets -- to avoid currency appreciation didn't affect overall levels of output or employment in the US, but it certainly affected the composition of output and employment. More money was allocated to home construction (for a time) and less to investment in the production of goods for export than otherwise would have been the case. My point is simple: A lot of global growth during the boom came in countries where the government owned or influenced the domestic banking sector and thus influenced the domestic allocation of credit. And policies that kept exchange rates lower than they otherwise would also indirectly encouraged private investment in those countries export sectors as well as discouraging investment in the export sectors of other countries. Governments were playing a significant role in the allocation of capital even before there was any talk of nationalizing the financial sector of key G-7 countries. Those who attribute the growth of the past several years solely to the market miss the large role the state played in many of the world's fast growing economies. Conversely, those who attribute all the excesses of the past few years to the market miss the role that governments played in financing many of those excesses ... " February 2nd, 2009 at 6:00 pm 1 Ying responds: "the stuff underlying the Davos consensus really was pretty good at doing lots of things, not least raising living standards in huge swathes of the developing world. States aren't traditionally all that great at allocating resources either" Isn't the boom the result of global credit expansion? For me, as the technology gap narrowed significantly between US and Asia countries,there seems to be a diminishing rate of return from global trade for countries all over the world. US was using credit expansion to keep its annual growth rate. China also resorted to credit expansion and increase loans around 10% or so to keep 8 or 9 percent growth rate in recent years. The past successful strategy doesn't guarantee that the same strategy will be successful in the future as the circumstances are evolving and changing. February 2nd, 2009 at 6:01 pm 2 Jian Feng responds: Brad, The influence of exchange rate (RMB/USD in particular) on export must have been exhaustively studied by economists. You seem to believe that the exchange rate plays a big role, but even if RMB/USD appreciated 100%, labor cost in China is still too low. Investors would still prefer opening up a factory in China to produce, for example, lithium batteries, than in the US. Many other factors are involved in shaping the export economy in China. I just changed the battery in my watch yesterday in Target. The sales lady first cited a potential liability to lawsuit as a reason not to do anything to the watch. Then she found that Target actually is still carrying the watch and agreed to change the battery, for $4. I felt lucky, because to change the battery for the more expensive watch that I bought at Macy's, I had to go to another store and spent $20. I am sure that you have been to China and you know how convenient and cheap it is to ask people to do things, more complicated things than changing batteries in watches. All greedy investors did that little investigation before they decide to open up a factory or research institute in China. February 2nd, 2009 at 6:13 pm 3 bsetser responds: Goldman did a study a couple of years back that found a 1% real depreciation increases china's export growth by 1%; most econometric work has found that a real dollar dep... |
| en.wikipedia.org/wiki/Fannie_mae Since the creation of the GSEs, there has been debate surrounding their role in the mortgage market, their relationship with the government, and whether or not they are indeed necessary. Despite this debate, Fannie Mae, as well as Ginnie Mae and later Freddie Mac, has played an integral part in the development of what was the most successful mortgage market in the world which has allowed US citizens to benefit from one of the highest home ownership percentages in the world. citation needed to expand mortgage loans to low and moderate income borrowers. At the same time, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit. Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's responsible underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families. "Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Does it make sense for borrowers to take on risk they may not be aware of? As a result, we gave up significant market share to our competitors. New York Times reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. In 2003, the Bush administration recommended significant regulatory overhaul of Fannie Mae and Freddie Mac However, the Democrats opposed that proposal, fearing that tighter regulation could sharply reduce financing for low-income housing, both low and high risk. Under immense lobbying pressure from Fannie Mae in association with Congressional Democrats led by Rep. Barney Frank, the Republican controlled Congress did not introduce any legislation aimed at bringing this proposal into law until 2005. However, this legislation too met with opposition from both Democrats and Republicans. This bill was passed by the House, but was never presented to the Senate for a vote. Washington, DC Fannie Mae buys loans from approved mortgage sellers, either for cash or in exchange for a mortgage-backed security that is comprised of those loans and that now, for a fee, carries Fannie Mae's guaranty of timely payment of interest and principal. verification needed In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Mortgages that don't follow the guidelines are called "non-conforming"; typically the secondary market for non-conforming loans deals in mortgages larger (termed "jumbo") than the maximum mortgage that Fannie Mae and Freddie Mac will purchase. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July of 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. edit Business One part of Fannie Mae's income is generated through the positive interest rate spread between the rate paid to fund the purchase of mortgage investments and the return it earns on those retained mortgage investments. Fannie Mae's mortgage portfolio was in excess of $700 billion as of August 2008. Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on the mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults. edit Conforming loans Fannie Mae and Freddie Mac have a limit on the maximum sized loan they will guarantee. The conforming loan limit for Fannie Mae (along with Freddie Mac) is set by Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of both GSEs. However, in 2008, since the demand for bonds not guaranteed by the corporations is almost non-existent, non-conforming loans are almost 1% to 15% higher than the conforming loans. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies. as investors became unsure about the adequacy of the capital held by FNMA US Treasury Secretary Henry M Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae Fannie Mae and smaller Freddie Mac own or guarantee almost half of all home loans in the United States. They face billions of dollars in potential losses, and may need to raise additional, potentially substantial, amounts of new capital as the current downturn in the US housing market continues. Markets assume that the taxpayer will if necessary take on the burden of all their mortgages because they underpin the whole US mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. edit No actual guarantees Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. edit Assumed guarantees There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. edit Federal subsidies The FNMA receives no direct federal government aid. However, the corporation and the securities it issues are widely believed to be implicitly backed by the US government. Congressional Budget Office wrote "ther... |
| video.google.com/videoplay?docid=-9050474362583451279 all Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. The Cowichan Citizens Coalition and its "Duncan Initiative" received high praise from those who previewed it. I recommend it as a painless but hard-hitting educational tool and encourage the widest distribution and use by all groups concerned with the present unsustainable monetary system in Canada and the United States. |