Tag Archives: Fannie

Paralysis By Analysis

I know the title is not original but then there aren’t very many things that are new under the Sun as the Good Book teaches us.  We should try to remember that more often when we peruse the day’s headlines about our economy.  One day it is housing that it topic one, then another it is GM or AIG, then it floats the Fed and what they are pondering.  With the economy as messed up as they can make it from Washington it is no wonder that the topics exceed the ability for cogent comments.

The last few days the topic as been on Fannie and Freddie again.  Woe is me, what to do, what to do.  The smartest guys in the room say we need to make changes.  But that Government, Inc. MUST have a continuing role in the housing/mortgage sector or the roof will fall.   Again it is a classic example of top down planning and manipulation of the private markets and political crony capitalism.   We need to start with the reminder that real estate law is and has always been the purview of the  individual states, not the Federal Government.  Article One, does not give the Feds the power to control the laws of real estate ownership or rental laws.  Some States are what are called Deed of Trusts states for taking a lien against real estate others are mortgage states.  The phrase “mortgage” is used loosely in the press but that it not quite accurate for numerous states.   How to sell and take good title to real estate is a state matter and likewise the perfection of a lien against real estate is a matter of state law. 

You can go back a really long way and find that under our Anglo-Saxon common law people have taken liens against real estate.  People usually didn’t have enough cash on hand to build a house or commercial building in London or Boston in 1700.  They had to borrow money to build it and then repay the loan over time.  The money came from private sources or from the early banks.  It is amazing how our country managed to survive and thrive for about 175 years after its founding without government involvement in what were private transactions.   Use any measure you like, economic growth, total wealth, jobs created, industry creation, standard of living,etc, and it is without argument that we had a remarkable run of prosperity and growth during all that time.  That even included the War Between the States and Reconstruction.   But then the Big Government gurus got power and decided to start taking over the housing sector.  They knew what was best.  It began roughly 60 or so years ago. 

All the early mortgages were private, they came from banks who would loan you the money and then collect on that loan with interest until you paid it off.  The bank had a strong interest in your ability to repay the loan. They checked you out.   That method worked wonderfully well for a very long time.  Then the social engineering started.  Fannie and Freddie along with FHA became bigger and bigger players in the mortgage game.  What if they no longer existed?  Would that mean the end of new housing, the end of selling your house, the end of finding financing to build or buy a house?  The answer is no.  There is money to be made lending for housing just as there has been for centuries.  People will find a way to make that system work.  Like the Savings and Loans of yore they will want to make money on housing loans.  In spite of the rhetoric in the newspapers today that is still a viable business.  It has its ups and downs like any business but it is a solid business. 

If Fannie and Freddie disappeared tomorrow, that void would be filled by others willing to loan for housing.   There is money to be made there even if there is no Fannie or Freddie to buy up the mortgages from the banks.  There were millions of loans made before Fannie and Freddie even existed and there would be again.   These arguments that the market for housing would collapse it balderdash. Yes, there would be some dislocation for a while as the new market grew.  But my heavens could that temporary problem be any worse than what we are already suffering?  Of course the politicians would lose lots of power because they couldn’t curry favor with one group or category for their votes.   The power of the purse would be in the hands of private enterprise.  It is laughable that Fannie and the like are called “Government Sponsored Enterprises”.  What is the government doing in private “enterprise”? 

Fannie and Freddie should be shut down over a 5 year period and there should be no government entity to replace them.  Let the banks do their own work and determine who is credit worthy for a housing loan.  Geithner, the tax cheat, says that the market would disappear but that is a lie.  There are millions of potential loans every year to be made.  If left alone private markets would move to fill that void quickly.  You may have noticed the recent article about the company that is redoing mortgage loans now for underwater or properties threatened with foreclosure.  They buy the loans from the banks at a steep discount and then work out a new deal.  They re-work most of them in a month or so.  You’ve read how those in government programs take months.  That is private enterprise in action.  That company will make a profit the homeowners have someone who will talk to them and make a new arrangement that its best for everyone.  The shame is that those loans weren’t made according to private enterprise standards in the first place.

The early Bank of New York made bunches of mortgage loans for the development of Manhattan after the Revolutionary War.  Hamilton and a few investors that the bank would help with the growth there.  He was right.  The politicians of the day were concerned about a bank that would favor merchants over the little guy.  The charter was delayed for years.  That first bank opened as a private bank.  You trusted them with your money and they trusted you to be good for the loans they gave you.  It was located on lower Wall Street.  That bank and others like it seemed to go pretty well for New York.  When it opened the population was less than 30,000.  By the time of the War Between the States it had a few hundred thousand.  http://www.olcranky.wordpress.com

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Can You Hear Me Now?

Some matters in history do recycle themselves even though we tend to ignore that fact.  The world has seen plenty of bubbles over the years.  There was the Tulip Bubble of the Dutch East Indies Company in the 17th century then the South Sea Bubble in the 18th century followed by several more during the 19th century on into our own contemporary times.  As long as we have a somewhat free market system we will  have another in the future for sure.  The Soviets didn’t have any bubbles during their 75 year reign and if they did we sure wouldn’t have been allowed to know about it.   Our recent housing bubble is part of a legacy from bad economic decisions by those in the market place and inevitably exacerbated by government action or inaction in every case.   One of the more profound of the bubbles was the Panic of 1893.

Of course our housing bubble was not the only cause of our recent financial distress.  You can certainly add a big dose of idiotic government policies regarding the purchase of mortgages by Fannie and Freddie and the exuberance of some on Wall Street to market those mortgage-backed securities.  Likewise the Panic of ’93 was caused by several factors.  The railroads over build capacity by leaps and bounds.  Indeed as part of this episode several rail roads went bankrupt.  A few of them you would recognize by name because they were resurrected.  Just as many believe the failure of Lehman Brothers in Sept. of ’08 was the true beginning of the financial crisis we have now, the failure of the Philadelphia and Reading Railroad in Feb of 1893 kicked off the Panic.  Later the Northern Pacific, the Union Pacific and the Atchison, Topeka and Santa Fe railroads would all go bankrupt but they live on now after their revival.  The country had undergone a great expansion for 15 years or so before this time in just about every category you can name–immigration, new railroads, mines, telephones, telegraphs, and industries of every sort plus the migration to fill up this still mostly vacant mid-west and west.   Just before this the silver mine production had reached a peak.  Our money was backed by both gold and silver at that time.  But gold remained the favored metal.   The government got involved which is always a bad thing in any market and required that millions of ounces of silver would be bought by the government.  Meantime a drought struck the Mid-West and severely hurt the farmers for several years and many ended up defaulting on their mortgages.  All this before worries about climate change and Fannie and Freddie, hard to believe isn’t it.

As these things occur, people started getting a little nervous about the economy. In 1893 the people moved on the banks.  Many decided it was better to have gold than silver or any paper money.  First it was just a trickle but soon a flood of demands on the banks.  Like always the banks could not pay everyone at one time.  No bank can ever do that if everyone demands all their money as the same time–remember “It’s A Wonderful Life”?   Like now, there was also alarm in Europe and many there decided to sell American stocks and get gold.  The price of silver and silver backed bonds dropped.  The US reserves of gold reached their limit and the US had to stop redeeming for a while the gold backed securities which only made the panic even worse.  All this was also made worse by the protective trade tariffs imposed in 1890 by McKinley.  As usual those trade barriers have more negative effects than positive ones. For every job protected more than that are lost from diminished trade.

One notable difference in all this panic was that it was Wall Street that came to the rescue of the government rather than Washington allegedly riding to the rescue.  It got so bad that in order to support the gold standard for our currency after we had tapped out, Cleveland had to go to J P Morgan and borrow 65 million in gold bullion for the government to bolster support for our money.   Wonder how it would have been if he had declined?  But he stepped up to the bar and helped out.  He also was a major factor in the Panic of 1906 by helping to resolve which banks could survive and  which would have to be closed.

Wm. Jennings Bryan and his group wanted the silver standard to be the only standard because this would cause inflation and the farmers, miners and others would be able to repay their loans with debased and cheap money.  Fortunately that didn’t work out for them.  Banks and money have to have some regulation but it should be the minimum.  Set rules evenly applied and known beforehand without constant tinkering by politicians.  There is no easy way to target with precision the “cause” of the Panic of ’93 anymore than we can pinpoint on Lehman or other matters now for our financial distress.  Usually, they come from a series of bad mistakes, too much optimism and heavy-handed government interference.  The government actions are always touted as well intended and necessary and the mistakes aren’t recognized as mistake at the time but opportunities (The Dotcom bubble) not to be missed.   We can learn and hope we will. 

In case you didn’t read it the Reconciliation Bill provides for 1 billion for “Federal administrative Expense” to implement the health care act.  That used to be a lot of money.  Can it really take that much to shuffle papers between bureaucrats?   http://www.olcranky.wordpress.com

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2 Cts. Worth on Politics, Climate, Economy

I wonder how well the folks at the EPA who are working on all the hazards of climate change are managing to get to work through the snow. Since they are so worried about CO2 as a climate changer and we are assured it is warming the atmosphere precipitously I am sure they are struggling in the heat of this winter to do the best thing for all of us whether we agree with them or not. I wonder if the climate professors and experts at Penn State are able to get to work this week and clean up more of their emails. If this climate warming doesn’t stop soon we’ll have ice sheets again moving down from Upstate New York. I wonder if the people in the Mid Atlantic are wearing their Bermuda shorts and sun tan lotion today with this record warming?

The climate has changed, many times over the eons of earth’s history. It has changed dramatically long before old homo sapiens began to walk upright. It will change again. That is a certainty. As long as we have the Sun, its radiation, its solar flares and sunspots, it will change. It will be influenced by the Moon and the tides. It will be affected by the tilt of the earth and our electro-magnetic field. Those are the mega influences and dwarf anything we do or think we can do to alter the climate.

How happy are the people who have already bought one of those Volts up East today? You might have missed the news items carried on the back pages but they merely confirmed the obvious to any thinking person. The touted 40 miles per charge (which is a puny amount of mileage) is further reduced by cold weather and traffic conditions. Sometimes the mileage may be only a bit more than half the advertised 40 miles. Could you make it from Trenton to Philly and back on a day like today?

Do you think that old KSM will end up being tried in Bismarck North Dakota? Talk about leaping before looking. That gang that can’t shoot straight is hell bent on “theatre” politics and international applause so much they don’t really understand basic American instincts and values. When the Viet Cong committed acts of terrorism against American troops they weren’t brought to the States for a trial. German saboteurs were summarily tried in military courts during the War and executed. Forget all the expense for a moment and just imagine being one of the ten of thousands of New Yorkers living within a couple of miles of the Manhattan courthouse. Would you want to have to drive through check points and be searched going in and out of your own apartment or have snipers on the roof? Trying our enemies during a war is why we have military bases. Try the characters there, if a trial is what they deserve.

Again from the back pages of the news and during the Holidays so little notice was given to the Treasury announcement of additional money for Fannie and Freddie. There was a limit of 200 billion, yes, you read that right for backing up their purchases of mortgages. That limit was removed by the Treasury. Now there is no limit at all as to how much money they can commit to buying and packaging mortgages. All with tax dollars and not from private industry. Those two now control 90% of all US mortgages. Seems to me that is asking the bank robber back because he forgot to get all the hundreds in the vault.

All the flap over the Toyota gas pedal problems and now braking problems remind me again that we need a mechanical backup at least for these systems. Before there was an actual cable that moved when you pressed the gas pedal or hit the brake. You really did control the process. Now those things are done by computer. You don’t contol the process but are merely giving signals to a computer about what you want it to do. Same is true now with airplanes. Have you ever had your electric windows not operate on a hot day? What would you have given to have had an old fashioned handle you could rotate to lower or raise the window and let in some fresh air? We’ve all had problems with our computers. They sometimes just do crazy things. I would rather trust my own physical abilities and instincts when it comes to driving than a computer. Yes, we malfunction too. But I would still rather know that when I step on the pedal I am making the car respond to my wishes, not depending on an intermediary to interpret my instructions. Interesting also that the US not only regulates the auto industry but is a competitor with Toyota. In the private world someone could be sued and rightly so for breach of fiduciary duty and conflicts of interest.

Want a bigger government role in your economy? Take a look at Argentina, Venezuela and Greece. The electricity is fading in one, in another the government is your banker and in another the world creditors are turning their back on requests for more money. Will the proposed policies of the current Government, Inc. group lead us to the same end?

On the typical cattle drive in the old west the fellow driving the chuck wagon was a true jack of all trades. The cowboys usually respected and relied on him. He was the cook and that meant a lot but he also was the doctor and the nurse. He often was the blacksmith for all the horses and veternarian for the herd. http://www.olcranky.wordpress.com

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Do markets or regulation work?

There has been a plethora of verbage about the market system for a couple of months and some have consisently stated that the problem was that there was not enough government regulation or that regulators were lax in their enforcement efforts and thus the markets ran wild and the subprime mess that started all these problems was the result of not enough regulation.   I would argue that the problem was too much political regulation that caused our current difficulties.    Markets thank goodness or not  emotional or political.  It is the collective wisdom of all us making  a million different decisions  a day.  Business do the smart thing.  An individual may make mistakes for  sure but the system does not it rewards winners and punishes losers just like the real world from time immemorial.

The “market” would have required that borrowers for home purchases have money down into the purchase of the home.   The lenders want the borrower to have an investment in the house.  They  want them to have something to lose if the mortgage isn’t paid, an incentive to make every effort to keep that house.  The “market” would have done vetting for the potential homeowner to verify that there was some employment record and that the mortgage payments would never exceed 30% or less of gross income for the homeowner under any circumstances.   Those were the standards for countless decades and as our economic health improved home ownership did increase–at a slower pace for sure but a steady one.   You weren’t allowed to borrow for the down payment from one bank to make it to another one and the bank making you the loan would hold your mortgage and service it themselves. 

Then along came those with grand ideas about social engineering and the scheme to allow those who didn’t qualify under market standards and vetting to acquire a home in any event because it was public policy and then public law and mandate.   The community redevelopment act and its progeny was regulation and micromanaging the market system.   The Regulators made clear to the banks  exactly what was expected of them and that they damn well had better start making the questionable loans to uncredit worthy borrowers or they would face the wrath of the Federal government and it regulators which have the power to put them out of business or at a minimum severely damage their business.   Sure enough those loans were made with the regulatory gun pointed at their head.  

Yes, there was excess in the market place in the packaging of these and other loans.  There is no question of that.   But what did you expect to happen?  Human nature being what it is people always try to figure out a way to make lemonade out of lemons.  The banks didn’t like doing this kind of business and didn’t like the Feds telling them who they HAD to loan to but they and the mortgage brokers and then the investment houses decided to pyramid up these loans and sell them like they were legitimate market investments.  The rating agencies went along with the scheme because they were making nice profits each time they approved a bundle of these loans.   Fannie and Freddie were buying up the loans because they also had been given their marching orders by Congress.   The government was getting what it wanted by manipulating the market until the house of cards mandated by the governnment had its inevitable crash.  The fact that these were bad loans from the git go to non credit worthy borrowers became apparent as more and more of them began to default.  You can hide the ugly pig in the living room only so long  eventually it will be seen by all.

The fact of those future defaults would not have surprised the “market” because the market would never had made those loans in the first place.   They were not market based loans but regulated loans.   I have written before that I have no sympathy with those who gamed this whole system and lost their bet or job.  That 27 year old mortgage broker making $500K a year was a sure sign that things were amiss.   Nor should we feel badly for those investment bankers and others marketing these loony loans like they were real loans.   Truth in advertising should have required them to disclose to the market place that these were “mandated” loans that were made only to satisfy the demands of Washington politicians and not because they met market standards.  They did not do this.  

The real irony now is that the very ones responsible for the debacle are the ones looking for scapegoats everywhere except in their own living room.  The insult to hard working decent Americans is that we are asked to bail out the irresponsible behavoir of those favored borrowers and the banks and investment bankers who rode the program to its crash.   Most sadly  of all is that the politicos in Washington are so far doing an exactly job of making sure the finger of blame is directed everywhere but at themselves.    It is the new speak of 1984 all over again.  

The market works just fine thank you very much; it always does and always will; what does not work is social engineering to shoe horn the market into a political agenda.   That is unless you want the Government to be in charge of everyone and everything.   One man’s opionion.  At least I can express it for the time being but I wonder how much longer that will be allowed.   The Dems want to regulate the internet for “content” and this voice and many others much more profound and worthy may soon be lost because of a bureaucrat’s interpretation of content being deemed “hateful” or divisive or whatever other standard they decide to apply.   Check  the proposed now law for yourself.   It didn’t get much play  last year because it didn’t even make to the Senate but it will be back next year for sure.

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Bailouts–What’s the Right Target

We have reached the point where we now have to refer to the bailout philosophy that dominates political discussion in the plural.   There is yet another proposal that is being bandied about on Capital Hill and those wood paneled rooms where wise men meet to determine our economic future.  The latest seems to be a smorgsborg of government largess for various groups, including naturally the proponenets say the “middle class”.  The Government can print money.   They don’t need to convince us that they can do that.   It does raise questions though about the worth of that money when more simply rolls off the printing press.  Supply and demand factors apply even to money.  If you have more of it then the value of each dollar diminishes.  I know that at the moment our dollar is holding its value well against other currencies but that is more due to the weakness in other countries than the inherent value of the dollar based upon the fundamentals of our American economy.  We are less sick than our contempories.   I consider that pretty faint praise for our dollar.   And once put into circulation it is hard to remove the money from the stream of commerce.   The only effective way to reduce the money supply in the future will be higher taxes and the Government spending much, much less than it is now.  How likely do you think it that that outcome will be tried?   The Government’s appetite for money is boundless because that money equates to power and influence and my experience is that politicians are loath to surrender either except when faced with a groundswell of opposition.   Where will that opposition come from down the road?   Certainly not from the plethora of special interests groups feeding at that Federal trough of money.

Our current spending binge for bailouts is like saying the cure for alcoholism is to offer another bottle of whiskey to the sufferer.   The misuse of money and credit got us where we are.   Sometimes cures require hard work and some sacrifice by the people and the Government.   Mistakes have been made by individuals and the Government and there are consequences that have to be paid for all of them.   By trying to eliminate those consequences for stupid behavoir the Government will be picking losers and winners.   I would much rather have the market pick the winners and losers.  At least then you can ride or fall on your own decisions and actions rather than the whim of politicians.

We have been told that we had a credit crisis and that was the driving force behind the bailouts of AIG, the banks and the investment banking houses and our dear friends at Fannie and Freddie.   It is postulated that the credit system among banks and investors has become so tenuous that the entire system is in danger of meltdown.   That  without all that credit flowing our economy can’t function.  At the same time we are told by others that the real issue is not just credit but the housing market and the falling price of housing in  the US.  Many argue that the housing issue is the root cause and therefore that we must offer a panoply of rescue packages to the homeowners, builders and mortgage lenders to stabilize those prices and values to make things start to turn around.   Some pundits even say we should help stabilize the market in  those crazy securitized mortgage instruments that were bundled and apparently sold around the world.  What is a laugh to me is that those buyers were supposed to be the “smartest guys in the room” whether here or abroad.

I posit that it is a credit problem we face but not the one involving investors or the banks.  Rather it is the credit that was extended in the first place to those buying these subprime loans.   The buyers of these houses with no money down and virtually no stake in their asset got a free ride up front and now are going to get another free ride from the Government.   Hell, they got an asset for nothing and only had to pay “rent” if you will and make the bet that the price would continue to increase and that someday they could sell the asset that they didn’t pay for at a nice profit.  There are no free lunches.  The fact they paid mortgages payments doesn’t impress me because they would have been paying rent anyway.    They had to live somewhere and pay for it.   At least that used to be the American approach that you had to pay your own way and pay for what you got.   I’m not so sure anymore.   It was the abuse of credit by the banks, mortgage bundlers, Fannie and Freddie and those homebuyers and all the others in that daisy chain that got us into trouble.  It was not the use of credit but abuse of it.   Credit is supposed to be earned based upon  performance, collateral and trust.   Those houses were and are worth something.  I am sure many are quite nice homes in nice neighborhoods but the market was overbuilt because of the credit manipulation in  the lending  process.    It is a credit crisis, not a housing crisis and  we are aiming our efforts in the wrong direction.   Without that credit abuse there would have not been all those homes built and all those near worthless mortgages extended.  That excess inventory of both housing  and credit needs to be adjusted downward.  The law of supply and demand can be manipulated  for a while and it can be nudged this way or that but the fundamental truth of the theory can’t be denied or changed by
Government manipulation.   I hate that I have been hurt by all this mess and I bet your have been hurt also and are as angry about it as I am.   Those homes are still there and other buyers with legitimate credit will be there to buy them for a price in time.  We have already been hurt and letting some hedge funds and others go down won’t make things any worse in my opinion.   We do not need to be pouring more money down the rat hole of this mess.  It will sort itself out over time if the Government will stand aside.   If the Government wants to do something helpful it could do everything in its power to promote business of all kinds and the creation of jobs in the private sector.  Most Government jobs don’t add to the economy but are a direct or indirect drain on it.   Yes, I know Government employees spend money and add to the GDP but they also have to be supported by taxes which  takes away from the economy.  Do the math for most of them and you’ll see they don’t help the economy.   We need some naturally; I want firement and policemen in my city.  Some of our fellow citizens rode the free train for a while and now we are all having to pay for that ride.   I don’t want to mortgage the future of my kids and grandchildren to promote the self aggrandizing agenda of politicians.  Let the market work.  Let our court system work.  Those that were defrauded have a remedy already in our law.   Yes “we ” are losing value in our investments but we’ve taken the hit.   Some people and businesses belong in Bankruptcy court for good reasons.   Some are the “waste” brush that needs to be burned off every now and then to make a healthier forest like our good envoirnmentalists friends teach us.

Maybe it is time to employ the Fabian tactics to thwart the idiocy of even more money being hurled at the wrong problem with dangerous unintended consequences for us all.  Oh, Fabian tactics means to wear out an opponent by delaying or obfuscating the battle rather than the direct attack.  I prefer the direct attack myself but will adopt whatever will work to put a cork back in the genie bottle of Government handouts to the  wrong  people.

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Money, Markets and Politics

With all the ado the last couple of days about Lehaman, Merril Lynch and reports on AIG it would do us all well to review a few of the basics of our economic system and the real world implications of any bankruptcy of these companies.   Of course the politicians will put their own spin on events to promote their personal agendas–which is to get elected, not necessarily solve any problems.  We are told that this is a credit and liquidity problem and that may be partially true but for whom is it a problem.   Per the stats at least 95% of you have a job and 98% of you are current on your mortgage and other debts.   The default rates remember are very small and clustered mostly around the government mandated loans of just the last few years to people who in fact were not credit worthy enough to get a loan on their own merit or they were speculators buying second, third or even fourth homes in the hopes of flipping them for a quick profit.  You make your investment and take your risk like the rest of us.  

The creditors of Lehman or Merril Lynch are the ones who face losses.  More than likely that won’t be any of you.  To keep the explanation simple, if you bought your stocks in your 401 or just in your own account with either of the brokerages you will be fine.  You are not a creditor as such.  Those are your assets, not theirs.  They in effect are the guardians for you assets.  I know they buy lots of the shares in “street” name but that really doesn’t change the fundamentals.   Also the SPIC has protection up the $500K which will cover most you if it is needed.  The reality is that the straight, heads up brokerage business will be sold by both of them in or out of any bankruptcy.  That is a money making proposition for the buyers and there will be plenty of other brokerages that would love to step into their shoes and take over your account for you.   That far and away is the most likely scenario.   It is the creditors of Lehman and Merrill who might suffer harm.  They actually loaned money to Lehman and are owed money.   They may  have to settle for cents on the dollar.  When they took their position they had counted on a nice profit.  But they did their own reserarch and are big boys.   They have the same consequences you and I do when we loan money or make an investment.   I know everyone says it will affect credit generally and that it will cause values to fall farther and make it harder to get a loan for a house or car.   There may be some effect but the consequences of this are being exaggerated wildly.  Hell, go back and read the comments in the early ’30’s or from 1987 after the market lost 22% of its value in one day!  We always think what is happening right now is the most important and stupendous event ever and lose sight of historical context.   Yeah, things might be a little slow for a bit, but this is not the end of the world as we know it; in fact you can’t even see the end of the world from  here.   The only fly in the ointment would be the Government stepping in to “solve” the problem.    As usual they muck things up more than they ever help.  Remember the operations of Fannie and Freddie were completley controlled by Congress for decades.  Those institutions did what they were told to do by Congress.  You are also reminded that corrective action was proposed by the Republicans several times over the last decade or so but it was blocked by the Democrats in the Senate and House even when the Republicans were in the majority.   This is not a defense of the Republicans.  They could have pushed harder and didn’t.   Let’s hope that time will heal most of the wounds  from this before Congress can do any more damage.   The market will correct itself.    The “market” is us and we’ll make decisions in our best interest if we are allowed to.

AIG is similar in that the consequences really won’t affect you.  First when they speak of bankruptcy they are talking about the parent company, the holding company, not the individual insurance  companies.  Insurance companies are not allowed to file bankruptcy under the Bankruptcy Code.   Insurance companies are controlled and regulated by the States and if they get into trouble they go into Receivership.   What happens then is that their “block of business” (the policies) is usually sold to another insurance company.   If you had a car insurance policy  with an AIG company you would keep paying the premiums and the policy would remain in force.  The insurance companies are required to have collateral if you will  behind the policy obligations they might owe.  Even if there were no buyers for the policies then the States all  have a requirements where they would make other insurance companies in their respective States take over all the policies.  So, the ordinary Joe with a policy for life, property, or homeowners coverage would have nothing to fear if AIG went down.   It is not  burden for the insurance companies taking over the policies because they would get all those new customers and the cash stream of their premium payments.

It is the creditors of AIG who are at risk.  Apparently that includes many foreign banks and sovereign investors.   I don’t care if they get paid or not.   When I have lost money on a stock purchase I never noticed anyone moaning about it and certainly no one stepped forward to bail me out of my bad investment.   Again the sound and fury from some quarters will be dramatic.    Please think about why they are squealing so much.   Is it possibly because it is their ox being gored?   The big boys on Wall Street promoted these deals and were paid handsome fees for their time.   And I ask who put their ox in that position in the first place.  It sure as hell wasn’t me or you.    The market will recover.  The American economy will be Ok after a short while.  The WORLD needs our economy.  They all want a piece of this American pie.  Never forget that.  The last thing any of them want is for the US to have long term financial difficulties.  We are their primary source of revenue–think China and the Arab States.

God bless to all.

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Capital–what is it and where does it go?

The Communists maintained that private Capitalism was the Devil incarnate and that all capital would be eliminated by them.   Everyone was going to live in an Utopian paradise where it was all for the State and the State was for all.   Capital was such an evil that no one would be allowed to have any.   But if the capital was owned or controlled by the State then it was a blessing.  Sure enough they made a grand effort at erasing it from their system, they even killed millions of their own in the effort. 

Of course capital exist and always will.  It can’t be eliminated anymore than the air you breathe.   It is a question of who controls the capital.  Capital is the land itself, the ores of the earth, buildings, machines, artwork and creative works, and of course labor.    The list goes on and you can add more.  Even the Communists realized that the capital would not simply vanish but they sure wanted to give the impression that it had and that all the resources of the USSR belonged to all the people collectively.   That was a myth.  Who controls the capital is the real issue.   You don’t need to have a big salary if you have a big house, a dacha in the country and regular trips to the Black Sea resorts and access to all the luxury goods of the world.   Someone got to use all those things.  It was the Party big wigs.   Before the dacha might have been owned by a merchant, doctor or professor, now the dacha was not owned by anyone but the State but if you were a Party favorite you had the dacha as your own.

Even the Communist had to use money.   Their ideal of a moneyless  society never got anywhere.   I mean if you wanted a pair of socks you had to pay for them.  The Communists realized they couldn’t merely allow anyone to go to the “sock” store and take as many as they wanted.   And money was a useful tool they soon learned for controlling behavoir.   If you were a good Party man you would be rewarded with the higher wage.  Non members were left on the sidelines financially.   That wealth of capital labor was controlled by the State.   It determined what your labor was worth.   There were no unions of course because they had no reason to exist according to the Communists.  Everything already belonged to the workers  through the State.  Throughout the existence of the USSR it kept gold reserves just like  the capitalist nations they publicly demeaned.  

Over the last several decades we have allowed more and more of our capital to be owned outright by the Government or controlled by the Government.  Look at Fannie and Freddie as only two examples of this.   If you thought about it you could make quite a list of the American assets (capital) now controlled by the Federal Government.  Some are proposing even more of those assets come under Federal control.   The Congresswoman from California recently stated she wanted to socialize the oil and gas companies.   Many want the universal health care system to go the full nine yards and end up with the Government not only controlling the dispensation of medical care but the actual ownership of the hospitals, medical equipment and all pharmaceuticals.   All those are captial. 

Who do you want controlling those assets?  Maybe you do prefer the Government because you think the Government will take care of the people.  With that control and the ability to “reward” special interests or punish percieved enemies comes the power to abuse.   Anytime capital is taken from one of our fellow citizens it is all of us who are at threat.  You may drive a cab and think it makes no difference if the Government owns all the hospitals but someday the same Government might decide public transportation is vital also and seize your cab and make you a Government employee overnight, at a wage set by a bureaucrat in Washington.  Every time the Government stakes out a claim to an area of industry or enterprise, it is taking control of capital that formerly belonged to a fellow citizen.   Think well upon this and how much capital and power you want to cede to people far away in Washington.   I trust you, my fellow citizens, much more than I do them, speaking for myself.

We are all in this together. It is well to remember that in this political season.  As  Ben Franklin said “We must, indeed, all hang together , or most assuredly we shall hang seperately”.   Don’t let them pick us off one at a time.   Each of us thinking that it won’t be so bad and “they” didn’t take my job, my asset my career, it was the other fellow.   You might be looking at the “other fellow” one fine morning in the mirror.

The crepe myrtles are in their fall bloom and the hummingbirds are still flitting away in the afternoon sun.   The deer have their full antlers now.   Soon the ladies will be planting their fall asters and seasonals.  More than one grumpy husband will be pulled into that venture.   The low scudding clouds always look a bit different once the calender turns over into September.  Have you ever noticed that?  They have that “fall” look even though the temperature hasn’t really dropped that much yet.  I havenoticed this since I was a child.

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Filed under Culture, Economics, government, Politics

Momma “Saves” Fannie/Freddie?

As I have written before I have been concerned that Mother Government would come to the rescue of Fannie and Freddie.  Well, it looks like she did this weekend.  I believe that sets such a bad precedent for the future.  They both were creatures of the Government from day one.  Fannie goes all the way back to FDR.  The Government should never have been in the mortgage business in any fashion.  But the situation endured due to politics over the decades and the intense lobbying of the Fannie folks themselves.   Here the bad news is laid at the feet of the Democrats.  They created it and nutured it for decades and made sure that Democratic-friendly management was in place.   Fannie and Freddie have poured millions into the coffers of the Democratic party over the decades with their lobbying efforts.   It is always a bad idea for any Government to get involved in the business affairs of the people.  Trust the people and let them make their own decisions and bear the consequences of those decisions.  The Republicans could have fought harder over the years but were too shy about appearing not politicially correct and somehow against the interest of the common man.  The common man would have been much better off over the years by having access to a healthy economy and mortgages that made sense from a business standpoint.  Anytime you have an industry that is “propped up” by the Government, you have a distortion in the marketplace that will cause harm sooner or later.  Later has arrived.

Fannie and Freddie do have assets.  They hold mortgages.  The vast majority of those mortgages are current and will remain current on their payments and represent a solid cash stream of money for an investor.  It is a long term investment and would be ideal for pension plans for example.   Those assets still have substantial value.  The folks who invested in a Government company took their chance and made their own assessment of risk.  They should not be rewarded with any Governement help.  Maybe they won’t be.   But that doesn’t offset the millions of dollars that went out in  profits to the shareholders over the years.  When I make an investement in any company, I take the risk.  I reap the reward if there is one and I bear the burden of loss when that happens too.  I bet you have made a couple of  bad investments over the years and no one came to offer you any help.    Bear in mind that the people who owe on their mortgages are in no danger as long as they pay their mortgage payments.  You and I have paid our mortgages on time like a slot machine for years.  We never received or expected any special breaks from anyone.    I have no sympathy for example for investors who bought numerous houses on easy financing and hoped to make a proft on the expeceted rise in home values.    They made an choice and why should we make sure now they don’t suffer a loss on an unwise investment? 

Now that they have been put into Conservatorship the Government should break them down into several much smaller units and sell them off to investors.  Investors will bid.  There is value and a profit to be made.  The Government should get out of the mortgage business entirely.   The Government already regulates the Banks and Savings and Loans, that is sufficient protection for the average Joe.   Do you really want all that Government regulation in your purchase of your next home?   Just read the fine print for once on a FHA backed loan.   Really read it.  It is your property why are you having to conform to all these regulations of the Government?   You won’t have to if you get a private loan.  Those private loans will be readily available if only the Government would get its finger out of the pot.

Also, the precedent is terrible.  You recall we have already mentioned that the Big Three Automakers were approaching Congress with a request for help, to the tune of Billions.   Read your paper and you will see that they are making their move now.  If the Feds are helping out Fannie and Freddie why not the Big Three?  There are lots of votes there with all those auto workers so sadly I think there is a good chance that the Government will offer “loans” or whatever to them.   After just stepping in for Fannie/Freddie it will be harder to say no.    God gave us free will so we could succeed and fail.  A life that “guarantees” only success is no life at all.  Go back and re read Fahrenheit 451 for example.  The Government can’t guarantee success and in fact it shouldn’t try.   Government help comes with a price–they want you to be in thrall to the powers that be in Washington–and you will be.  

Electromagnetism is an amazing property or force.  If you have magnets and a conductor and a little motion you get electriciy to power your home or shaver.  With electricity you can make magnets.  What a circle of power.  That force gives us life itself.  Our magnetic field in Earth literally saves our lives each day.  We would be killed within minutes by the other elements of the electromagnetic force produced by our Sun without its protection.  Gamma ray, x-rays, radio waves, light itself are all part of the electromagnetic force.   Those are only a few of its magical and life sustaining attributes.  I find it spiritual in application.  Not all bodies in the Universe have a magnetic field.  Mother Nature sure doesn’t care if there is one on Earth.  There isn’t one on the Moon for example.   Just one more marker that something special happened when this place we call home was created.

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Filed under Economics, government, history, Politics

Fannie/Fredie–All Fall Down

It looks like Congress is about to go along with the President and approve some sort of Government bailout of both Fannie and Freddie.   I personally think that is a bad idea for a number of reasons.   These institutions have been around for a long time and were creatures of the Government in the first place.   Fannie goes back to FDR days.   Was it really needed then or over the intervening years?   Do you believe that private entreprise couldn’t have financed the mortgages needed of the last 70 years?  All those Government programs that were started during the Great Depression didn’t really solve the economic woes of that day.   They may have helped but only marginally.   What brought us out of the Depression was WWII.   Talk to the older folks and ask them if they were doing well in 1939 or 1940 and most will tell you no.

Supposedly Fannie/Freddie hold about 5 trillion dollars worth of mortgages.   Surely you have noticed how that estimate has bounced around in the media; I have seen it as high as 9 trillion and as low as 4 trillion.  But whatever the number you must remember that the overwhelming majority of those loans are current.   The borrower is performing and paying off the loan.   If Fannie/Freddie went under “we” would not lose trillions.   The loss would only be for the bad loans.  Yes, it might be a pretty big number but manageable.   Of course if we didn’t do anything then we taxpayers would have no loss at all.  During the Savings and Loan crisis of the late ’80’s we had a lot of them fold and the loss was in the billions but only on the bad loans and most of the loss was due to Government regulators coming in and demanding revaluations of everything with a very implicit threat that the new values had better be lower to justify the actions of the politicians.   Guess what, the values were lower and the losses aggravated.

Does the Government really need to be in the mortgage business?   There is and always has been ample money for mortgages in the private sector.   That mortgage business has to compete for money just like any other business and that is as it should be.   The Government “implicit” guarantee of the business of Fannie/Freddie will now become explict it appears and that will cost all of us money.   It is a private company even though chartered by Congress.   Those investors in Fannie/Freddie knew what they are buying.   I am not excited about anyone having to take a loss but exactly why am I responsible for the private business decisions of others.   If the Government ends up buying stock it will take the majority position and control the companies and then we face a “busines” that is existing to promote the agenda of one party or the other; rather than a company doing what it thinks is best for its shareholders.   Just another variation of Bread and Circuses for the masses is what it will become.

If you have dealt with the IRS, SSA, HUD or any other Government agency, can you just imagine having to go to a Government office when you have issues with your mortgage, take a number, and then findly meet with  a low level bureaucrat who is more interested in watching the clock than offering a service.  After all they can’t be fired as a practical matter.

If they did fail please think through what the actual results would be as opposed to the alarums of the Politicians.  Their assets would be liquidated.   There would be buyers who would want to get that stream of income from all those millions of performing loans.  The shareholders would lose.  They made a bad bet.   The average Joe who remains  current on his mortgage would not notice any difference except  maybe a new place to make his payment and a new holder of his mortgage note.   The failure of Fannie/Freddie would not “cause” a  foreclosure crisis.   Don’t believe that for one minute.  That is pure balderdash.   If the note is paid there is no foreclosure.    Yes the mortgage market might well be smaller for a couple years but that is the offset to the thousands of imprudent loans made earlier and those shaky subprime notes bought by Fannie/Freddie.  They didn’t have to buy those notes.  Our economic well being is best served by prudent business decisions made by both the consumers and the businesses serving them.   Bailing out Fannie/Freddie does not promote those  good  decisions.  It encourages people to make unsound decisions and rely on Mother Government to fix everything if things don’t go well.   Failure is not always a bad thing.  Hell, it is the cornerstone  of Darwinian theory.

Most importantly it would send the right message to the market place and the buying public.  I don’t like Socialism in any of its forms whether for business or the masses.   It brings a loss of individual freedom as its price.  Your options are reeduced in any area that is dominated by the Government.  I don’t want the Government to have a monopoly on the mortgage business.

“Stand Tall”, my mom  used to say that to me  when I was a boy and teen.   Those two words carry more than one message and all of them are worth heeding.     First, it is good for your body as my mom said.  Secondly, it evokes the right attitude toward difficulties we face in life.  No matter the problem or  how low we feel about them we must and should stand tall.   Think about the alternative.  It implies being a good soldier and “soldiering on” in the face of adversity.  Lastly, it means to be a good person with dignity and integrity.   All those messages were worth hearing.  Thanks Mom.

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Filed under Economics, government, Politics