Krugman - Fannie, Freddie can't be allowed to fail

[Doctor_J]

"Here’s the background: Fannie Mae — the Federal National Mortgage Association — was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.

The case against Fannie and Freddie begins with their peculiar status: although they’re private companies with stockholders and profits, they’re “government-sponsored enterprises” established by federal law, which means that they receive special privileges.

The most important of these privileges is implicit: it’s the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.

...

Still, isn’t it shocking that taxpayers may end up having to rescue these institutions? Not really. We’re going through a major financial crisis — and such crises almost always end with some kind of taxpayer bailout for the banking system.

And let’s be clear: Fannie and Freddie can’t be allowed to fail. With the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole. "

http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=1&oref=slogin

[still_one]

1. It was the deregulation of banking started by reagan and finalized by Clinton that did this

When you have them now talking about setting up rules requiring proof of income before mortgages are approved, you know this has been coming for a long time

[MasonJar]

17. You put in Clinton and left out both Bushes? Under Clinton the government

not only diminished the enormous deficit left by Reagan and Bush Sr, and the deregulated savings and loans but also left a surplus, which the w got rid of in 18 months.

[still_one]

18. Agreed /nt

[fasttense]

2. Krugman is often very wrong.

He pushed for Greenspan's interest rate cuts and look where they got us.

[still_one]

3. It was under greenspan where they removed food and energy in determining inflation /nt

[Zynx]

8. Headline inflation still includes food and energy. They just ignore it for policy decisions.

The number still exists.

[Renew Deal]

5. Look at almost every angry article he wrote during the election.

He was wrong almost on a weekly basis.

[Zynx]

7. If you are comfortable with collapses that would deepen the recession dramatically

then be my guest. If you don't think it would affect you, you are a fool.

[Warpy]

14. The rate cuts weren't intrinsically bad

If finance had been as strictly regulated as it was 50 years ago, those rate decreases would have led to a real boom instead of a series of speculative bubbles.

I find Krugman right more often than he is wrong. What I do find is that he sometimes misses an important piece of a complex puzzle, a fault I share.

The puzzle, after all, is very complex.

[Renew Deal]

4. Krugman is trying to pacify the left.

I get what he's saying. But this whole Fannie-Freddie business seems fundamentally flawed. They shouldn't be permitted to act like a private company while leaching off of unlimited funds from taxpayers.

[Zynx]

6. Failure would mean a disaster of proportions not seen since the 1930s.

That would be the most serious financial collapse in history. It cannot be allowed to happen.

[The2ndWheel]

9. And what problem is the solution going to create?

[Zynx]

11. I'd rather deal with that than having firms with $1.5 trillion in bonds default.

No consequence of bailing them out could be that bad.

[The2ndWheel]

13. Unless the consequence is worth 3 trillion in defaults next time

There isn't much of an answer. We can't stop, and we can't keep going. We can't bail it out, and we can't let it die.

[Renew Deal]

10. I'm not advocating collapse

I understand why the government needs to support these "companies." I just think that they should be fully private or fully public. It's wrong that taxpayers have to bailout "companies" that can take almost unlimited risk.

[Doctor_J]

12. Part of the Reaganomics model is privatizing healthy companies and socializing

sick/dying ones. It's part of the Big Picture now.

[Democrats_win]

15. Intersting article. Who pays for these failed banks or will we borrow that money too?

If we borrow the money from China to pay for this, we'll have even more inflation causing the price of gas and food to increase.

Why not tax the rich bankers to pay for this bailout instead of using inflation to squeeze the money out of poor Americans? Make them pay for this instead of people who can barely feed their families.

When will the rich start paying their fair share?

[soothsayer]

16. At least their debt is backed by collateral; that is, they hold the mortgages, so

even if every one goes into foreclosure, they could sell all of the properties. So with the housing market, they'd lose what---20% or so? That's not all that big.

[cliss]

19. Re: Too big to fail.

These 2 giants are going to fold, anyway.
The rescue will come, but it won't be enough. FNMA and FMAC need constant, BIG infusions over the next few months in order to survive.

They are currently sitting on portfolios which are depreciating daily. Not only that, but the FED needs to prepare for more bank failures. I believe it's around 90 more waiting in the wings. One of them could very well be WA MU which is rumoured to be insolvent right now. What about Lehman Brothers who no one wants to do business with them. Or CITI which is swimming upstream.

The FED currently has used up around 50 % of its emergency reserves.

Paulson + Bernanke know this. They are just trying to stave off the meltdown a few more days.

[Amonester]

20. I'm just curious to know how many millions their "havemore" CEOs and ...

the mafiosos all the way down to the VeePees of everything have "earned" (read: "stolen") in the form of "bonusses" of all sorts...

Anyone knows? :shrug:

In such a case, why would the working class have to pay for bailing these crooks out??