You may have noticed on the news yesterday (9/7/2008) that the US Government just took over the two “mortgage giants,” Fannie Mae and Freddie Mac.
Fannie and Freddie are the two companies that allow banks and credit unions to trade mortgage loans as investments. If these corporations went under, the U.S. economy would have gone into deep recession (or possibly depression) as financial institutions could no longer sell off mortgages to free up cash. Selling mortgages is a major source of liquidity for institutions. This liquidity enables banks and credit unions to make new loans to their clients.
For example, a particular credit union that I know very well actually keeps very little liquidity/cash on hand because they loan it all out to members. When they run low on liquidity (because they’ve lent it all out), this credit union will sell off a few million dollars in mortgages to FNMA (“Fannie Mae”). However, if they were no longer able to do so (if Fannie became insolvent), this financial institution wouldn’t have a source of “quick liquidity.” If deposits didn’t come in quickly enough (the savings and checking funds of their members, etc), the credit union wouldn’t have anything to turn around and loan out to members.
Anyway – the takeover was expected. Not necessarily agreed with by everyone, but expected.
Nationalizing a business is extremely socialistic (“communistic”). It’s something that China and Russia do regularly. However, the US government isn’t doing this for a profit, so it is, admittedly, different – and temporarily permissible even for a Libertarian like myself. Our congress is very aware of the population’s intolerance for nationalized corporations, so these conflicts of interest tend to turn into privatized corporations as quickly as possible. Hopefully within a decade or two.
An example of an exception to this rule would be a case like the Bonneville Power Administration. They operate the majority of hydroelectric installations (and a nuclear power plant) in the Pacific Northwest. Bonneville is still a federally-controlled agency under the Department of Energy. However, they’re operated as a not-for-profit, meaning that the Federal Government can’t earn money on the company. Power is generated and sold at-cost.
Personally, I think Congress should have let one of the mortgage giants fail completely (specifically Freddie Mac) to teach the market a lesson. Subsequently, Fannie should be rescued with a 30- or 20-year, low-rate amortizing loan from the Treasury (similar to a standard small business loan or a family mortgage loan). Eventually should be carved up into 4 or 5 smaller companies and sold off to domestic-only investors.
Unfortunately, this is not how the Congress has decided to work things out. Presently, the capital infusion comes via a stock purchase with an expected 10% return to the Treasury. What a ridiculous idea. “Hey guys, we know you’ve lost $14 billion this year, but we’re going to give you up to $100 billion in liquidity each whether you like it or not, and we expect you to give us a 10% return on the funds.”
Many Democrats want to permanently nationalize the companies. This would put the US Government in direct economic control of more than half of family home loans in the United States. It’s kind of a pseudo-Marxists, “Mao Zedong meets the Kremlin” type of evil idea. The Republican party would never let it happen, but it does show how truly insane some members of the democratic party has become.
Anyway, the U.S. economy will live to die another day.
September 11, 2008 at 10:24 am |
It would be easier to read your thoughts here if you could share them without demonizing those who don’t agree with you. Is it necessary to call ideas that don’t line up with your own “evil” and “insane”? Your argument can be strong (would be stronger) without the inflammatory rhetoric. Just a thought.
September 15, 2008 at 8:51 pm |
One is certainly left to wonder if the same exact objection would be made to so-called “inflammatory rhetoric” that demonizes the likes of President Bush, Senator McCain or Governor Palin…
September 17, 2008 at 6:24 am |
What does “amortizing”mean?
September 17, 2008 at 11:16 am |
Emily,
My apologies for throwing “amortizing” in there without an explanation. Sometimes those financial terms jump onto the page without first being filtered into normal-speak.
“Amortizing” simply means “act like a normal consumer loan” with regard to payment terms. An amortizing loan is one in which interest and principal are paid back together such that the balance of the loan is fully paid off as of the last payment.
A loan that is not amortizing is one for which the full principal is due at the end of the loan term. For example: if I borrow $10,000 from my credit union in the form of a Term Note (non-amortizing), I only make interest payments until the end of the term, at which time I owe the $10,000 principal in full.
An amortizing loan to FNMA and FMAC would ensure that the principal was paid off at the end of the term. A term loan would leave the world “hoping” that they played their cards right and had enough funds to pay back the principal at the end of the term.
However, as things stand, neither of these are an option. Instead, the Treasury has opted to take the socialist route and take over ownership and operation of the two firms. As of this morning, the federal government has also done the same in response to the AIG crisis.
And for my other readers, these closing statements are not a matter of opinion. This type of equity takeover is definitively command-economy. I apply socialism in its technical meaning, not as an emotional modifier.
Brandon
September 17, 2008 at 12:53 pm |
Stacey,
Thank you for your feedback. I always appreciate an outside perspective on my writing. It is never my intent to alienate my readers on the basis of my tone. After all, if I lose my audience, what would be the good of my writing?
By “demonizing” my audience, I assume you are referring to the sentence where I refer to the permanent takeover of FNMA and FMAC as “evil.” Please note that I said the idea is evil, not the people who came up with the idea.
And for the record, permanently nationalizing FNMA and FMAC (or any other major corporation), in my opinion, is a demonic and fascist idea.
I have not seen any example where a beneficial situation was the result of long-term direct socialism. I realize that we are not living in the past, but I also do not believe that humanity has evolved to a “higher state of being” under which socialism would now work.
I’m still corrupt. Aren’t we all?
Brandon
September 17, 2008 at 1:50 pm |
Thank you. That makes sense.
What would the ramifications be if this type of amortizing loan was used to bail out a large national bank such as, oh, say..WAMU?
September 18, 2008 at 9:25 am |
Leif, no demonization of President Bush is necessary. He takes care of that on his own, I’m afraid.
And what I’m getting at is not the rhetoric of the media. I agree that the tone is out of control on both sides where that’s concerned. I guess what I’m getting at is the ability of friends to disagree, which is fine, and argue their criticisms, which is fine — without using loaded words that make the other party feel as if they can’t disagree without aligning themselves with “demonic fascism” or some other such nonsense.
I wish that we could use the same tone we’ve used when discussing these issues in my living room as we do here on the web, if that makes sense.
BJ, I’m not even really disagreeing with you on the bailout thing. (How do you feel about events in the last few days? Scary). I merely disagree with your tone (i.e. using terms like “evil” and “fascist,” when you could make your criticism on more concrete grounds) because it comes across as an attack on my morals and my intelligence. I keep “them” — conservatives — in mind when I write about politics, because that’s largely the community I’ve come out of, and I temper my tone because of it, even though I don’t agree with McCain and Palin’s stance on very many things.
I just want the same so I feel I can be a part of the conversation.
If not, no worries. Like I said, there’s always football.
September 24, 2008 at 8:11 am |
Ah yes, the pathetic attempt of a libertarian to try to explain how this wasn’t the fault of an unregulated system. If there had been real oversight, these companies would not have been allowed to take the insane amount of risk they did buying up subprime and predatory mortgages.
The libertarian solution is that “the market” is always right. It weeds out these predatory guys by… what? Destroying the entire financial system, along with half the world economy and generations of insurance? Small price to pay for an idealized version of reality?
I actually give some credit to this author for making the huge libertarian leap into the real world by admitting that some sort of assistance may have been necessary, but he is at odds with his free-market ideologue libertarian companions, like Ron Paul.
The libertarian attitude in a nutshell: If only there had been absolutely no rules for anybody, nobody would have done the wrong thing! ALL HAIL THE MARKET!!!
October 10, 2008 at 10:43 pm |
[...] original comment by “I Hate You, Jazz,” as posted in my blog titled “A Libertarian’s Perspective on the Mortgage Giant Bailout” is shown here: Ah yes, the pathetic attempt of a libertarian to try to explain how this [...]