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If John McCain can win this election race with a 50-pound ball called “George W. Bush” wrapped around one ankle and a 50-pound ball called “The U.S. Economy” wrapped around the other…He would be the Michael Phelps of politics.
Just to set the record straight…
Fannie and Freddie are GSEs because there is an implicit guarantee. Not just by the government, but by the tax-payers.
The implicit guarantee encouraged the capital markets to offer them a lower cost of capital, so they can borrow more cheaply than traditional lenders. Unlike the view of some posters on the ABC blog, the government is not the source of their funding.
The implicit guarantee also allowed them to get big, and as they got bigger, they became more of a systemic risk. That is, their size posed a risk to the entire system. Their more recent expansion into trading and holding sub-prime (higher-yielding) securities, along with the decline in home values, eroded their capial base, which made the Asian banks, among others, begin to seriously question their solvency.
Most people know what happens from there, but the short of it is: the shareholders and creditors forced the government make its implicit guarantee explicit.
As for Palin’s comment:
The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help
If anything, Fannie and Freddie made financing cheap and encouraged the market to provide unrealistically generous terms for sub-prime buyers of homes. This encouraged more home-buying, inflated the bubble, and increased the size of the systemic risk posed by Fannie and Freddie.
The only thing that was expensive was the option value of the put on Fannie & Freddie’s massive exposure to the housing market. But no one was pricing that. Instead, everyone was focused on recycling foreign reserves into higher-yielding, implicitly guaranteed paper — GSE paper. This is Bernanke’s “savings glut.”
We —and not just Americans— received the benefit of this cycle. We had cheap stuff made in China, increased profits at our MNCs, a growing stock market, unheard-of valuations for our homes, in which we invested unheard-of amounts in new kitchens, bathrooms, and other stranded assets.
China has been able to employ record amounts of people, raise their standards of living, and though under continued criticism for their general mode of government, invest in the infrastructure necessary to provide future growth.
The pending insolvency of the GSEs and general seizures in the credit markets, however, put a stop to the salad days. Spreads widened. Buyers of GSE paper began to lose interest. People asked, if the spread for paper from a implicitly backed GSE is widening, shouldn’t it also be wider for everything else? Credit choked up, and the “recycling” phenomenon began to slow down. The problem was, the recycling phenomenon is responsible for ensuring capital flows, which in turn is responsible for maintaining the housing market, etc. Hence, conservatorship.
As far back as 2002, [George Bush] began arguing for greater regulatory control over the companies, but was thwarted by Republicans who controlled Congress. (Democrats eventually granted the authority, which provided the legal underpinning for the takeover announced on Sunday.)
—SHERYL GAY STOLBERG – NYTimes
If the housing market doesn’t turn around, then Fannie and Freddie become bad assets. Paulson sold this to Congress as, `Give me a blank check and I won’t have to write it.’ The question now is: How big is that check going to have to be?
—Vincent Reinhart, former director of the Fed’s Monetary Affairs Division
The pound is about 20 percent too strong against the dollar, even after falling more than 10 percent this year
—International Foreign Exchange Concepts Inc., the world’s biggest currency hedge-fund company.
There is no relief out there. A part of the government is giving up hope of this economy doing better in the next couple of years. That tells us a lot.
—Hans- Guenter Redeker, the London-based global head of currency strategy at BNP Paribas SA, on Chancellor of the Exchequer Alistair Darling
The past weeks and months you have clearly seen the deterioration in growth in the U.K. The pound still looks expensive.
—Andrew Balls, EVP and member of the investment committee of PIMCO (+$800b aum)
“Plots” are an expression in Pynchon of the mad belief that some plot can ultimately take over the world, can ultimately control life to the point where it is manageably inanimate.
The past is never dead. It’s not even past
—Faulkner and Politics from Requiem For a Nun
Stilltitled 