corneliuspeaks

It is very scary to libertarians like me, but the conservatorship of Fannie and Freddie goes back to the man on the ten dollar bill – Hamilton, creator of the central bank. Many consider him the premier American economic genius who understood the configuration of the most powerful economy on earth and capitalism itself. He was ahead of his time. A powerful Fed making mitigating moves would have his approval.

The Bush Administration handling of the economy is decisive. The moves have been effective, and calming to the markets. And thus the markets have made an orderly retreat to lower levels. In spite of the real estate melt down, the political season and the credit crunch, there has been no recession.

Fannie and Freddie have deteriorated into hybrid semi bureaucracies with many closets needing cleaning. Clinton crony appointees mishandled and ruined the agency with reckless and mercenary management. They scored millions for themselves and as the piper shows up to be paid, they can be found as advisors to Obama campaign.

I would counsel them that the loss of innovation is the curse of bureaucracy. The engine of incentive and the hunger for innovation is lost within taxpayer supported establishment. It breeds things like tenure, seniority and mediocrity and most importantly irresponsibility. The sub prime debacle simply brought that weakness to a head.

Fannie and Freddie were so bureaucratized; they could not go below their current rates. No matter how low fed rates went, mortgages were anchored to the cost of bureaucratic waste and big-time commissions for management. Fannie and Freddie were sapped of competitive capability by government secured complacency.

Sub prime loans were sub prime for a reason. They were made with liberal lending rules that succumbed to the needs of real estate over-development. For their troubles, sub prime lenders got a great deal more interest for taking that risk. We can say that they have already received their due.

Irresponsible rhetoric of an impending Great Depression aside, there has been only one month (December ‘07) of contraction. Though the first had a small expansion the last quarter shows a robust 3.3% growth and an unemployment rate that for the last six years has been consistently lower than the last four decades. Too bad for the big tax and spenders, the tax cuts must be given credit for the economy’s strength in meeting these headwinds. Now is not the time for big tax and spending suggested by candidate Obama. I would argue there is never a time.

But the political season has descended into politically correct hyperbole like; “Everyone is suffering and we are descending into a Great Depression.” has alarmed everyone and destroyed public confidence. Still, while the sub prime debacle reverberates all over the world, the American economy retains strong fundamentals. There is historically low unemployment, interest rates and last year’s inflation rate is not excessive compared to recent history.
But consumer confidence has been driven into the ground by politics. But confidence is really the only thing this market needs to meet the challenges brought on by excesses of overdevelopment and risky mortgages.

I also take issue with the term “bailout.” Considering the exact term “bailout,” the rhetoric is hyperbolic. A Resolution Trust Fund has its assets backed by real estate which is exceeded only by gold as collateral. The real value of property investing is in its intrinsic value.

And it is real, it regains its value when it is put back on line as housing for either buyers or renters. If these homes are not allowed to become derelict, investors would do well to back a privatized Resolution Trust Fund that has a competent property management component to put the property back online. This is a job for a real estate manager of the highest caliber.

We must remember that unless fraud is proven and people are prosecuted for misleading borrowers, the unqualified and defaulted buyer are the specific party that breeched the contract by failing to make payments. In many cases buyers received that privilege without down payment and without a good credit report. These buyers lived in a house they could not afford. And they walked away when they could not make the usury interest rate payments . . . Duh? But the most important question is why were taxpayers guaranteeing such instruments?

Fannie and Freddie are partly private businesses, just like any bureaucracy, Fannie and Freddie descended into complacency. Instead of responsibility in buying sub prime mortgages there were “agreements” padded with winking eyes that every bureaucratic administrator knows about. By the time it was disclosed that sub prime mortgages were risky, it was too late. But being outside the competition makes one rusty and feeling secure. In the bureaucracy one hand washes the other that has grease for the palm. Well, the party is over.

For those who could not afford sub prime loans, the foreclosed, they will have to claim bankruptcy if necessary; then if they want their own home they must get to work rebuilding their credit and building a real down payment. But for now they are a perfect rental market (perhaps lease purchasers) for the Resolution Trust Fund. That will create affordable housing from existing housing, not from over development.