Government Pressure Led Fannie Mae and Freddie Mac to Increase Their Subprime Loans

FannieMaeFormerHeads.jpg “Former heads of Fannie Mae and Freddie Mac testified in the House Tuesday: left to right, Richard Syron, Daniel Mudd, Leland Brendsel and Franklin Raines.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B3) Fannie Mae and Freddie Mac engaged in “an orgy of junk mortgage development” that turned the two mortgage-finance giants into vast repositories of subprime and similarly risky loans, a former Fannie executive testified on Tuesday.
. . .
And in March 2006, Enrico Dallavecchia, Fannie Mae’s chief risk officer, wrote to Mr. Mudd to say, “Dan, I have a serious problem with the control process around subprime limits.”
Despite the concerns, Fannie Mae further increased its purchases of subprime loans, according to a January 2007 internal presentation.
Freddie Mac’s senior executives ignored similar warnings. Donald J. Bisenius, a senior vice president, wrote in April 2004 to a colleague that “we did no-doc lending before, took inordinate losses and generated significant fraud cases.”
“I’m not sure what makes us think we’re so much smarter this time around,” he wrote.
Housing analysts say that the former heads of Fannie Mae and Freddie Mac increased their nonprime business because they felt pressure from the government and advocacy groups to meet goals for affordable housing as well as pressure to compete with Wall Street.

For the full story, see:
LYNNLEY BROWNING. “Ex-Executive Faults Fannie and Freddie for Nonprime Loans.” The New York Times (Weds., December 10, 2008): B3.
(Note: ellipsis added.)

Fred Thompson Satirizes Current Economic Bailout Policies

ThompsonFredOnTheEconomyDec2008.jpg Source of image: screen capture from the Fred Thompson video commentary described, and linked-to, below.

My brother Eric alerted me to a wise and witty video commentary by former Senator Fred Thompson satirizing current government bailout policies. The video has been posted to multiple locations. Here is the link to the posting on YouTube:
http://www.youtube.com/watch?v=RKc4XFK0iVY

I Was Wrong: Apparently the U.S. Auto Industry Does Have a Prayer

PrayingAutoIndustryMiracle.jpg“PRAYING FOR A MIRACLE.   S.U.V.’s sat on the altar of Greater Grace Temple, a Pentecostal church in Detroit, as congregants prayed to save the auto industry.” Source of the caption and photo: online version of the NYT article quoted and cited below.

The process of creative destruction, requires that failed businesses be allowed to fail, so that the resources (labor and capital) devoted to the failed businesses, can be devoted to more productive uses.
The Danny DeVito character in “Other People’s Money” makes this point in a speech near the end, in which he says that the Gregory Peck character has just delivered a “prayer for the dead” in calling for continued support for a dead business that is technologically obsolete.
On a more personal level, we have always bought cars from Honda and Toyota, because we sincerely believe that they build better cars than Detroit does. By what right does the government force taxpayers to prop up companies whose products have been rejected in the marketplace?
When the economic and moral arguments for bailout fail, all that is left for a failed industry is prayer (and politics)—one more reason to believe that the opportunity cost of prayer, is high.

(p. A19) DETROIT — The Sunday service at Greater Grace Temple began with the Clark Sisters song “I’m Looking for a Miracle” and included a reading of this verse from the Book of Romans: “I consider that our present sufferings are not worth comparing with the glory that will be revealed in us.”

Pentecostal Bishop Charles H. Ellis III, who shared the sanctuary’s wide altar with three gleaming sport utility vehicles, closed his sermon by leading the choir and congregants in a boisterous rendition of the gospel singer Myrna Summers’s “We’re Gonna Make It” as hundreds of worshipers who work in the automotive industry — union assemblers, executives, car salesmen — gathered six deep around the altar to have their foreheads anointed with consecrated oil.

While Congress debated aid to the foundering Detroit automakers Sunday, many here whose future hinges on the decision turned to prayer.

Outside the Corpus Christi Catholic Church, a sign beckoned passers-by inside to hear about “God’s bailout plan.”

For the full story, see:
NICK BUNKLEY. “Detroit Churches Pray for ‘God’s Bailout’.” The New York Times (Mon., December 8, 2008): A19.
(Note: The photo of the top appeared on p. A1 of the print edition of the December 8, 2008 NYT; also, the online version of the article has a date of Dec. 7 instead of the Dec. 8 date of the print version.)

PrayingAutoIndustryMiracle2.jpg“Worshipers at Greater Grace Temple, a Pentecostal church in Detroit, prayed on Sunday for an automobile industry miracle.” Source of the caption and photo: online version of the NYT article quoted and cited above.

Reason for Success of U.S. Economy: “We Let People Fail”

McCain’s chief economic adviser and entrepreneur-expert Hotz-Eakin offered some cogent comments on the trend toward more government bailouts at the taxpayers’ expense:

(p. A6) Mr. Obama is by no means an activist in the Japanese mold, said Douglas Holtz-Eakin, an economic adviser to John McCain’s presidential campaign. But as a whole, policies crafted to address distinct problems in the auto, energy and banking sectors are merging into a broader policy that would pick some winners and losers, preserve entire industries and shape consumer choices.

“We’re backing into industrial policy in an emergency to correct massive market failures,” said Jared Bernstein, an economist at the liberal Economic Policy Institute who has worked with the president-elect’s economic team.
. . .
“The reason the U.S. economy was so successful for so long was not because we did things so well. It was because we let people fail.” Mr. Hotz-Eakin said. “This is dangerous at some very deep level.”

For the full story, see:
JONATHAN WEISMAN. “Wider U.S. Interventions Would Yield Winners, Losers as Industries Realign.” The Wall Street Journal (Thurs., NOVEMBER 20, 2008): A6.
(Note: ellipsis added.)
(Note: the final paragraph was in the print edition, but was deleted from the online version.)

Chatwani Vies for “Worst Timing Ever Award”

ChatwaniAmit.jpg “Amit Chatwani, writer of Leveragedsellout.com and a book, “Damn It Feels Good to Be a Banker.”” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. A28) Happy hour in the financial district has its own taxonomy. The other night amid the several sidewalk tables on Stone Street, Amit Chatwani, the 26-year-old behind the satirical Wall Street blog Leveragedsellout.com, broke down the scene within seconds of his arrival.

The young woman carrying a canvas “deal bag” with the Goldman Sachs logo was most likely a bank associate, he surmised. The younger-looking man reading the so-counterintuitive-it’s-intuitive business book “The Black Swan” was an analyst with big-picture dreams. And the rest of the tables were filled with tech-support and human-resources staff, he figured.
“They have to be back-office, because it’s too early for bankers to be out,” Mr. Chatwani said. “They could be traders, I suppose. Or compliance and risk management, which is basically middle-office that’s treated as back-office.”
But Mr. Chatwani would be the first to admit that his assessments of the culture of Wall Street are not, at the moment, holding their value. His book, written under the name Leveraged Sell-Out and entitled “Damn It Feels Good to Be a Banker,” was published by Hyperion in August, giving it a fair claim to some kind of Worst Timing Ever Award.

For the full story, see:
ERIC KONIGSBERG. “Attn, Satirist of the Spoiled of Wall Street: Bad Timing, Dude.” The New York Times (Thurs., October 16, 2008): A28.

The reference for The Black Swan book mentioned above, is:
Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable. New York: Random House, 2007.

A marvelous review of The Black Swan, is:
Diamond, Arthur M., Jr. “Review of The Black Swan: The Impact of the Highly Improbable.” Journal of Scientific Exploration 22, no. 3 (Fall 2008): 419-22.

When the Ship Is Sinking, Schumpeter Suggests: “Rush to the Pumps”

Wabash economics professor Ben Rogge’s best lecture focused on a question made famous by Schumpeter: “Can Capitalism Survive?” In some ways, Ben’s message was a pessimistic one.
But near the end of his lecture, Rogge included the following quote from Schumpeter’s Capitalism, Socialism and Democracy:

(p. xi) This leads to the charge of “defeatism.” I deny entirely that this term is applicable to a piece of analysis. Defeatism denotes a certain psychic state that has meaning only in relation to action. Facts in themselves and inference from them can never be defeatist or the opposite whatever that might be. The report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down and drink. But it can also rush to the pumps.

Source of quote:
Schumpeter, Joseph A. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper and Row, 1950.

Reference to Rogge’s collection of essays that includes the title essay mentioned above:
Rogge, Benjamin A. Can Capitalism Survive? Indianapolis: Liberty Fund, Inc., 1979.

“We Will Stay a Laissez-Faire Economy”

AnsipAndrusEstonianPrimeMinister.jpg

“Andrus Ansip, leader of Estonia, an ex-Soviet Republic.” Source of caption and photo: online version of the NYT article quoted and cited below.

An earlier entry suggested that Estonian Prime Minister Andrus Ansip’s support for Steve Forbes’ flat tax, had helped Estonia achieve a high rate of growth.
Apparently there is some sentiment in Estonia to stay the course:

(p. B6) TALLINN, Estonia — For nearly two decades, Estonia embraced capitalism with such gusto that it seemed to be channeling the laissez-faire philosophy of Milton Friedman. From its policies meant to attract foreign investors to its flat tax and freewheeling business culture, it stood out as the former Soviet republic most adept at turning post-Communist chaos into a thriving market economy.
Now Estonians, and some of their Baltic neighbors, are slogging through their first serious economic downturn since liberation from the Soviet grip in the early 1990s.
. . .
Whatever happens, government officials say there will be no betrayal of Friedman’s philosophy. “We will stay a laissez-faire economy,” said Juhan Parts, Estonia’s minister of the economy.
. . .
“I’m an optimist,” said Marje Josing, director of the Estonian Institute for Economic Research. “Fifteen years ago things looked bad, but they managed. A little real-life pressure won’t hurt.”
Indeed, so far the downturn has done little to discourage Estonia’s ambitious entrepreneurs. If anything, it has made them look more avidly elsewhere for growth.
“Estonia may be a small country,” Tarmo Prikk, chief executive of Thulema, an office furniture maker, said with a laugh. “But my ego is bigger.”

For the full story, see:
CARTER DOUGHERTY. “Estonia’s Let-It-Be Economy Is Rattled by Worldwide Distress.” The New York Times (Fri., October 10, 2008): B6.
(Note: ellipses added.)