The bulk of its lead editorialtouting the prospects for bipartisanship is focused on pushing the Johnson-Crapo bill, a measure that would replace Fannie Mae and Freddie Mac with a system whereby the government guarantees 90 percent of the value of privately issued mortgage backed securities (MBS). This means that Goldman Sachs, Citigroup and other folks who might issue MBS could now tell their customers that even in a worst case scenario they couldn't lose more than 10 percent of the value of their securities.
Fans of the market should be asking two questions here. What problem is this intended to solve? And why do private issuers need a government guarantee?
More moral hazard and perverse incentives in FIRE.
Washington Post Pushes for Government Guaranteed Subprime Mortgage Backed Securities
Dean Baker
Government has an interest in promoting home ownership especially among the poor and non-white who tend to rent more than own. If the government takes some losses during economic downturns, so what, it doesn't matter! It is better than having a generation of renters. A foreclosed loan doesn't benefit bankers, it is income to the person foreclosed on.
ReplyDeleteProsecuting and forcing all the losses from mortgages onto originators and servicers wasn't really a viable strategy while keeping all the profits from interest for government coffers. Interest rates compensate for risk, if government agencies are going to collect higher than risk free rates, and provide mortgage insurance they need to accept a majority of the risk. All risk isn't from crappy bankers. Alot comes from crappy economic management of the macro-economy.
The documentation process has become cumbersome and ridiculous. Any non-w2 income pretty much disqualifies an applicant for a mortgage because the documentation to prove that you aren't lying is nearly impossible for most people. Even Bernanke couldn't get a mortgage using the current government system of requirements for lenders because his book and speaking income couldn't be documented properly. Lenders simply don't want to spend the time or money to document non-traditional compensation. If they accept a document that is later questioned, they have to take all the losses while the government takes none. The system is designed to keep bankers on the hook with losses while government profits.
But our current economy has enormous numbers of people who no longer participate in the formal economy. The statistics are horrible if you don't have white skin or work for government or S&P 500 company, you can forget about getting a government mortgage.
The political rhetoric from the progressives, which before 2008 was too inclusive and drove lenders to make bad loans, has now shifted to demand irrationality in tight lending standards. Next week when the racism and damage being caused by progressives becomes apparent, they will blame the bankers again. The Democrats have become a comedy of bafoons. It's a wonder they can get elected at all given the lack of focus on what is good for the people and economy as whole. Stupid political rhetoric that drives bad policy and hurts the economy fools no one. In the end, it hurts the Democrat brand, and will lose elections.
Right Ryan their heroine Liz Warren wants "prime minus 1%" for student loans and she thinks this is "justice" ..... LOL!
ReplyDeleteIt's a sad state of affairs, Matt. The most liberal idea supported by the most liberal politician is market based interest rates! I expect these policies from Repubs, but Dems! Wow.
ReplyDeleteThe guffaws coming from the fat cat billionaires that fund the Democrat party can be heard over the tongue in cheek policy proposals by their selected politicians. Surely these liberal politicians are disappointed by what they are allowed to propose by their Buffet-Soros masters?
Austere Europe offers basically free tuition or much, much lower tuition rates in places like the UK with progressive repayment schemes when employment is had. The US political system is diseased.
I never got the US education system, but I never got the healthcare system either.
ReplyDeleteEven in a world dominated by people who thinks we can run out of money, most non-banana republics have some sort of social education and healthcare systems and if they are well-thought they are efficient and ok'ish.
But in USA these two topics are always highly polemic when there is ample evidence about how to design and maintain those systems (even on balanced budgets lol). Is this bullshit internal battle over 'you are just a commie' and freedom zombies instead of approaching problems pragmatically. Imagine what USA could do with improved education and healthcare systems and liberating waste on military spending and oversized navies and armies, trillions available for investment in things like real estate development, (green) infrastructure, research programs, etc. Potentially unleashing billions monthly for both consumer demand indirectly and investment directly.
It's easily explainable in one word, Ignacio.
ReplyDeleteRace.
US politics and culture is deeply affected by race, and it's getting worse owing to the demographics. It's impossible to comprehend otherwise.
Ryan,
ReplyDeleteMoney would be much better spent in providing low cost rentals than in subsidizing a housing bubble. Michael Hudson has it right when he advocates a Land Value Tax on property. The LVT basically prevents housing bubbles from occurring, and provides for stable property prices. Of course, the banks cannot extract as much rent from these two policies.
Liberals ideas put forth by someone like Dean Baker would never go for an LVT. He is paid by unions, most unions survive by investing pension and healthcare funds in Real Estate, Stocks and Bonds. Baker can make rattling noises about change and labor power, but the unions that are entrenched in the financial system, sit on cushy board seats, rake in millions, don't really want to rock the boat too much, do they? The old days of crime bosses running unions and genuinely fighting the system have given way to finance owning the unions and shaking down workers to supply their hedge funds with capital.
ReplyDeleteWhy not just have the government provide all the mortgages at cost and cut out all of the middle men.
ReplyDeleteWould seem logical. It worked with student loans, when they moved lending to the Dept. of Ed. The only problem is that interest rates have become a political issue and source of leverage/revenue in budget negotiations.
ReplyDelete