Sep 10 2008

Nader and Roberts look at Fannie and Freddie

Who Needs Regulations When You’ve Got a Golden Parachute? by Ralph Nader, and A Temporary Respite from Permanent Decline by Paul Craig Roberts: Both via counterpunch.com.

The interesting point is the comparison of the two articles.  Paul Craig Roberts was…

…Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com.

While Ralph Nader, the Democrats favorite boogeyman, is an icon of the left known for his strong advocacy for consumers over the years.

Roberts’ key point:

The Treasury already has to borrow $600 billion a year to finance the operations of the US government. How much in addition will the Treasury need to borrow, or co-sign, in order to keep the two companies afloat and to keep mortgages from defaulting?

The total could be greater than the US Treasury’s credibility.

Ralph’s:

So here we are. On Monday September 8, 2008, the value of common Fannie and Freddie stock dropped to under one dollar – just one day after Secretary of the Treasury announced the government takeover. White House Press Secretary Dana Perino said, “[F]or years we have encouraged Congress to put in place a strong, independent regulator to oversee the institutions. We believe the actions will help to improve conditions in the housing market.”

Senate Banking Committee Chairman Christopher J. Dodd , D-Conn has questions for the Administration, so there is more to be revealed. And, reporters are spilling buckets of ink talking about the takeover of Fannie and Freddie and the lack of proper oversight by regulators and Congress which brought us to this day of appreciation for regulation. Too bad it is all a little late for the small shareholders, and pensioners and taxpayers who pay the bill for speculators and executives, many of whom seem to escape with lots of money.

Both seem to think this is a bad sign for the economy and both seem to not be sure that the bailout is going to work in the long term.  If their pessimism proves to be warrented, we’re in for a really bad time economically.

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3 comments

  1. Strange bedfellows, indeed!

  2. …and the bailout working in the long term is a question which depends on your definition of “working”.  If the purpose is, as I keep pointing out, preserving the credit rating of the United States, it will probably work.

  3. http://www.nytimes.com/2008/09…

    Fannie and Freddie had to be rescued – otherwise debt deflation would have gotten much worse. Indeed, their financial troubles have already caused problems for would-be home buyers: mortgage rates are up sharply since earlier this year. With the federal takeover, which removes the pressure on the lenders’ balance sheets, we should see mortgage rates drop again – which is definitely good news.

    But is it enough? I doubt it.

    The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Mr. Bernanke and yours truly. We wondered whether the same thing could take place here – and economists at the Fed devised strategies that were supposed to prevent that from happening. Above all, the response to a Japan-type financial crisis was supposed to involve a very aggressive combination of interest-rate cuts and fiscal stimulus, designed to prevent the crisis from spilling over into a major slump in the real economy.

    When the current crisis hit, Mr. Bernanke was indeed very aggressive about cutting interest rates and pushing funds into the private sector. But despite his cuts, credit became tighter, not easier. And the fiscal stimulus was both too small and poorly targeted, largely because the Bush administration refused to consider any measure that couldn’t be labeled a tax cut.

    As a result, as I suggested, the effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese.

    So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle – a struggle we seem to be losing.

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