On the costs of governmental Social engineering

[JamesMorrison]

Just wanted to post this D.Brooks NYTcolumn to see if anyone had any thoughts about the wisdom and costs of allowing American politicians to have their way with our hard earned money:

Who Is James Johnson?
By DAVID BROOKS
Published: June 16, 2011

Most political scandals involve people who are not really enmeshed in the Washington establishment — people like Representative Anthony Weiner or Representative William Jefferson. Most scandals involve spectacularly bad behavior — like posting pictures of your private parts on the Web or hiding $90,000 in cash in your freezer.

But the most devastating scandal in recent history involved dozens of the most respected members of the Washington establishment. Their behavior was not out of the ordinary by any means.

For that reason, the Fannie Mae scandal is the most important political scandal since Watergate. It helped sink the American economy. It has cost taxpayers about $153 billion, so far. It indicts patterns of behavior that are considered normal and respectable in Washington.

The Fannie Mae scandal has gotten relatively little media attention because many of the participants are still powerful, admired and well connected. But Gretchen Morgenson, a Times colleague, and the financial analyst Joshua Rosner have rectified that, writing “Reckless Endangerment,” a brave book that exposes the affair in clear and gripping form.

The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. Appointed as chief executive of Fannie Mae in 1991, Johnson started an aggressive effort to expand homeownership.

Back then, Fannie Mae could raise money at low interest rates because the federal government implicitly guaranteed its debt. In 1995, according to the Congressional Budget Office, this implied guarantee netted the agency $7 billion. Instead of using that money to help buyers, Johnson and other executives kept $2.1 billion for themselves and their shareholders. They used it to further the cause — expanding their clout, their salaries and their bonuses. They did the things that every special-interest group does to advance its interests.

Fannie Mae co-opted relevant activist groups, handing out money to Acorn, the Congressional Black Caucus, the Congressional Hispanic Caucus and other groups that it might need on its side.

Fannie ginned up Astroturf lobbying campaigns. In 2000, for example, a bill was introduced that threatened Fannie’s special status. The Coalition for Homeownership was formed and letters poured into Congressional offices opposing the bill. Many signatories of the letter had no idea their names had been used.

Fannie lavished campaign contributions on members of Congress. Time and again experts would go before some Congressional committee to warn that Fannie was lowering borrowing standards and posing an enormous risk to taxpayers. Phalanxes of congressmen would be mobilized to bludgeon the experts and kill unfriendly legislation.

Fannie executives ginned up academic studies. They created a foundation that spent tens of millions in advertising. They spent enormous amounts of time and money capturing the regulators who were supposed to police them.

Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement.

Most of the people were simply doing what reputable figures do in service to a supposedly good cause. Johnson roped in some of the most respected establishment names: Bill Daley, Tom Donilon, Joseph Stiglitz, Dianne Feinstein, Kit Bond, Franklin Raines, Larry Summers, Robert Zoellick, Ken Starr and so on.

Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next.

The scandal has sent the message that the leadership class is fundamentally self-dealing. Leaders on the center-right and center-left are always trying to create public-private partnerships to spark socially productive activity. But the biggest public-private partnership to date led to shameless self-enrichment and disastrous results.

It has sent the message that we have hit the moment of demosclerosis. Washington is home to a vertiginous tangle of industry associations, activist groups, think tanks and communications shops. These forces have overwhelmed the government that was originally conceived by the founders.

The final message is that members of the leadership class have done nothing to police themselves. The Wall Street-Industry-Regulator-Lobbyist tangle is even more deeply enmeshed.

People may not like Michele Bachmann, but when they finish “Reckless Endangerment” they will understand why there is a market for politicians like her. They’ll realize that if the existing leadership class doesn’t redefine “normal” behavior, some pungent and colorful movement will sweep in and do it for them.

Thoughts?

JM

 

[Wiseacre]

If it was me in charge, Fannie and Freddie would be gone. Why the hell the federal gov't should be involvd in Housing is beyond me. Does the book go into solutions to any degree? Nice post BTW.

 

[Susan45]

I have a question, and I ask this sincerely...

Is this what privatization looks like?

 

[JamesMorrison]

If it was me in charge, Fannie and Freddie would be gone. Why the hell the federal gov't should be involvd in Housing is beyond me. Does the book go into solutions to any degree? Nice post BTW.

Thank you for your kind words and actions. I came across this while on another errand. I don't want to come across too geeky here but I am in a months long process of formulating an answer, on an another forum, to a member of the left that insists the government had absolutely nothing to do with the latest financial crisis and that anyone that says so is, at least, uncaring about those less fortunate then themselves, if not worse. He also invokes the left's tropes of 'greedy Wall Street' types and the creation of such financial products as Mortgage Backed Securities (MBS), Credit Default Swaps, and "lack of regulation". I am always suspicious of explanations that opportunely offer moral judgments about situations that can be explained simply by objective facts and figures.

In answer to your question: I have not read the Book in question. I might point out that Canada has a vibrant housing market that has been successful without the degree of the U.S. government's social engineering. There is little reason a free housing market cannot successfully provide more homes for lower income groups with out government intervention. As to solutions, I would look to, as a first and general step, the curtailing of those governmental progressive efforts to "help" (The last 2 1/2 years of government subsidy and creditor arm twisting should end so that housing prices can find a point where current inventories are cleared).

As to efforts towards the prevention of the past crisis for the future economy, an elimination of government in the market is the generally prescribed elixir. For specifics, here is an article from the American Spectator The author was one of the members of Obama's progressively biased FCIC (Financial Crisis Inquiry Commission). The commission's final report is here. Wallison's dissention is just before the appendixes. For a more in depth explanation of Fannie M and Freddie M and the guilty government agencies and a timeline of their specific actions leading up to the crisis you must read Ed Pinto's (once Fannie's chief credit officer) fully sourced 70 page memorandum to the FCIC which was, essentially, ignored by the progressive majority but on which most of Wallison's dissent was based. Pinto's work is an essential source for those arguing for the conservative point of less government in markets and personal freedom--just the facts.

Sorry for the extended post.

JM

 

[Trajan]

frankly and I think Toro or William would back me up here, killing F&F right now, may be catastrophic. The private mortgage market is pretty much anemic right now and yes, that is one instance in and of itself of blow-back ala F&F having been given such a huge mandate,

We are going to have to unwind it, and to that I say, lets get it started.

 

[JamesMorrison]

I have a question, and I ask this sincerely...

Is this what privatization looks like?

I am unsure as to what, exactly, your question refers to. Perhaps a clarification?

However, let me point out something here that you may already know. Fannie and Freddie are GSEs (Government Sponsored Enterprises) created by the U.S. government. They are truly rare congressional creations. They are private in the sense of profit (Their stocks are sold on public stock exchanges and Executive's bonuses) but are implicitly backed with the full force and credit of the U.S. government. Simply put: any profit goes (or did go) to a certain finite number of individuals. Losses, however, belong to each and every American. Privatization of the two FM's at this point would not take taxpayers off the hook. It is due to the two FM's that many more Americans are, now, quite clear on the meaning of 'Moral Hazard'

 

[grunt11b]

If it was me in charge, Fannie and Freddie would be gone. Why the hell the federal gov't should be involvd in Housing is beyond me. Does the book go into solutions to any degree? Nice post BTW.

Why do they need to be involved in housing? I will tell you why, Because before progressivism took hold in America people owned private property "Which is the biggest symbol of liberty", both land and houses. The government got involved because then they could hold your house over your head when the time comes. You will do what they tell you to do, or you will lose your house. You no longer own your house or your land, because you only own it by proxy, they actually own it if you financed it through them.
I heard it best told on a talk radio show one time, the guy said if you where a progressive looking at a bridge, and hated the bridge and wanted to change it, you could not overhaul it all at once, because people would notice, so what you do is wait over time for it to break piece by piece, and then you replace it piece by piece with the parts that YOU want it to be, and over time, you will replace that bridge and by the time anyone notices it will be too late. This is how progressives are destroying our country and our liberties, one piece at a time, while noone is even noticing it. Fanny Mae and Freddy mac are just two pieces of their overall plan to bring this country down economically. Medicare/Medicaid,social security, welfare and Obamacare are all other pieces, they are all in the red right now "Except obamacare because it has not been implemented yet" and will cause this economy to collapse over time, and every bit of it was all by design starting with the creation of the federal reserve.

 

[JamesMorrison]

frankly and I think Toro or William would back me up here, killing F&F right now, may be catastrophic. The private mortgage market is pretty much anemic right now and yes, that is one instance in and of itself of blow-back ala F&F having been given such a huge mandate,

We are going to have to unwind it, and to that I say, lets get it started.

I totally agree. But at some point I think it might be wise to privatize the FM's especially if we must make the choice between (the taxpayers) taking an actual loss in their sale or prolonging the agony and dumping in more taxpayer money to them in the hope that, later, we might get a, somewhat, better price--time value of money and all that.

But selling them off and taking the loss would probably allow prices to fall thus allowing the sale of these bad assets (sub-primes etc). This, of course, will only work if the government stops trying to prop up the market and keep prices up. The government, through various mortgage subsidy programs for the last two years is, now, doing explicitly what it did implicitly in the run up to the housing bust/financial crisis: encouraging, through legislation, regulation, and monetary policy, an overvalued housing market. As long as buyers and mortgage lenders feel housing prices are too high those mortgages will not be forthcomimg. High unemployment also informs this market and is also another unintended effect of this administration's Keynesian and other anti-business policies. The government must let prices fall to their natural level. Add to this the trend for more conservative lending practices that would have kept us out of this mess to begin with and we will probably see an even more depressed housing market near term.

JM

 

[JamesMorrison]

If it was me in charge, Fannie and Freddie would be gone. Why the hell the federal gov't should be involvd in Housing is beyond me. Does the book go into solutions to any degree? Nice post BTW.

Why do they need to be involved in housing? I will tell you why, Because before progressivism took hold in America people owned private property "Which is the biggest symbol of liberty", both land and houses. The government got involved because then they could hold your house over your head when the time comes. You will do what they tell you to do, or you will lose your house. You no longer own your house or your land, because you only own it by proxy, they actually own it if you financed it through them.
I heard it best told on a talk radio show one time, the guy said if you where a progressive looking at a bridge, and hated the bridge and wanted to change it, you could not overhaul it all at once, because people would notice, so what you do is wait over time for it to break piece by piece, and then you replace it piece by piece with the parts that YOU want it to be, and over time, you will replace that bridge and by the time anyone notices it will be too late. This is how progressives are destroying our country and our liberties, one piece at a time, while noone is even noticing it. Fanny Mae and Freddy mac are just two pieces of their overall plan to bring this country down economically. Medicare/Medicaid,social security, welfare and Obamacare are all other pieces, they are all in the red right now "Except obamacare because it has not been implemented yet" and will cause this economy to collapse over time, and every bit of it was all by design starting with the creation of the federal reserve.

To many, your piece sounds like some crank conspiracy theory. However, at the risk of becoming labeled by those on the left as radical...Oh, too late! Seriously though, I have heard noises about the extreme left wanting complete chaos in this country so that they may take advantage and implement their ideology (think Russia-Lenin and Egypt-Muslim Brotherhood). This present administration's actions to ward off a coming bankruptcy of Social Security and Medicare (i.e. no action), its job killing policies and its profligate spending of the last two years provide more fodder for this belief that the left subscribes to this thought that from anarchy they might rise phoenix-like. But perhaps the explanation is simpler: they simply have no clue how things really work in this world and, as long as someone else is paying, they could care less.

JM

 

[dblack]

I have a question, and I ask this sincerely...

Is this what privatization looks like?

Depends on who's doing the 'privatizing'. Most efforts at 'privatizing' government services simply establish government granted monopolies, or various other forms of corporate welfare. The Freddie/Fannie story is something along those lines. True privatizing (which almost never happens) simply involves getting the state out of providing a given service and letting others fill in the gaps as they will - or won't.

 

[Susan45]

I have a question, and I ask this sincerely...

Is this what privatization looks like?

Depends on who's doing the 'privatizing'. Most efforts at 'privatizing' government services simply establish government granted monopolies, or various other forms of corporate welfare. The FEMA story is something along those lines. True privatizing (which almost never happens) simply involves getting the state out of providing a given service and letting others fill in the gaps as they will - or won't.

Thank you, I think you 'got' what I was trying to ask. It seems to me after reading the Brooks op-ed that the Fannies really got in to trouble when they became a for profit entity. So rather then them being a well run government agency, like SS, they became more like a for profit mortgage company and that became to root of their downfall. All that excess money without decent safeguards. It actually seems to me that we would have been far better off if it were a complete government agency rather then the hybrid it became.

 

[dblack]

Thank you, I think you 'got' what I was trying to ask. It seems to me after reading the Brooks op-ed that the Fannies really got in to trouble when they became a for profit entity. So rather then them being a well run government agency, like SS, they became more like a for profit mortgage company and that became to root of their downfall. All that excess money without decent safeguards. It actually seems to me that we would have been far better off if it were a complete government agency rather then the hybrid it became.

Couldn't agree more. We're developing a very bad habit in the US of forming 'partnerships' between private industry and government. in general, this amounts to privatizing profits and socializing losses. It works out nicely for the companies in question (and their investors), and often for the politicians who set it all up (as they're usually long gone before the damage is realized), but it's horrible for freedom and democracy.

I can't say it often enough. We need to insist on separation of state and the economy in much the same way we insist on the state staying out of religion.

 

[Susan45]

Thank you, I think you 'got' what I was trying to ask. It seems to me after reading the Brooks op-ed that the Fannies really got in to trouble when they became a for profit entity. So rather then them being a well run government agency, like SS, they became more like a for profit mortgage company and that became to root of their downfall. All that excess money without decent safeguards. It actually seems to me that we would have been far better off if it were a complete government agency rather then the hybrid it became.

Couldn't agree more. We're developing a very bad habit in the US of forming 'partnerships' between private industry and government. in general, this amounts to privatizing profits and socializing losses. It works out nicely for the companies in question (and their investors), and often for the politicians who set it all up (as they're usually long gone before the damage is realized), but it's horrible for freedom and democracy.

I can't say it often enough. We need to insist on separation of state and the economy in much the same way we insist on the state staying out of religion.

Thanks for answering me. I'm not sure how to take your last sentence. It seems to me that the Fannies should never have been made into a quasi-private entity. But I think that was part of what happened during the regulation cutting debacle. So I really do agree with you on that.

But, I have no problem with the government borrowing and using monies from SS. I don't know a thing about medicare so I'm not discussing that. But I do know a lot about SS and I think it's fine that the money from SS is used. After all, it's borrowed with T-bonds being used as collateral and the interest is going back to the fund and used for the taxpayers. So, in a way that would be the state not separate from the economy. Sorry, I can't seem to find a good way to say that.

Let me give you another example. Did you know that all flood insurance is backed by the government? So here is a case where a so-called private enterprise is fully backed by the government. Does the government have the right to regulate price? To limit profits? I don't have the answer. Frankly, I was very surprised when I found this out.

Flood insurance - Wikipedia, the free encyclopedia

So dB...I'm not sure we can keep them separate. And if we don't, where is the line.

 

[dblack]

So dB...I'm not sure we can keep them separate. And if we don't, where is the line.

Well, we'll never have perfection, in any case. We certainly don't have a perfect separation between government and religion, but we try. The most important thing is that we share it as a value and, for most Americans, the thought of the state telling us how we must worship, or even that we must worship, is repugnant.

Sadly, we don't have the same respect for an individual's freedom to earn a living and spend their money the way they choose. The state will inevitably have an impact on the economy - just as they inevitably have in impact on religion. Government is responsible for laying out the rules that we all must follow, but that's not what I'm talking about. What I want to see effectively banned is using the power of government to decide who wins and loses in the free market. We do this in a wide variety of ways (from tax 'incentives', discriminatory regulation, etc, all the way to straight up bailouts and state-granted monopolies) and every time we do it we feed the monster of corporatism - giving corporations and private wealth more and more incentive to control our political process.

I'm droning on now, but I trust you get what I'm saying. The 'line' should be as tight as we can make it. Government shouldn't be allowed to meddle in economic activities (other than enforcing basic justice) and private business shouldn't be profiting from government programs. They should be kept as separated as possible.

 

[Susan45]

So dB...I'm not sure we can keep them separate. And if we don't, where is the line.

Well, we'll never have perfection, in any case. We certainly don't have a perfect separation between government and religion, but we try. The most important thing is that we share it as a value and, for most Americans, the thought of the state telling us how we must worship, or even that we must worship, is repugnant.

Sadly, we don't have the same respect for an individual's freedom to earn a living and spend their money the way they choose. The state will inevitably have an impact on the economy - just as they inevitably have in impact on religion. Government is responsible for laying out the rules that we all must follow, but that's not what I'm talking about. What I want to see effectively banned is using the power of government to decide who wins and loses in the free market. We do this in a wide variety of ways (from tax 'incentives', discriminatory regulation, etc, all the way to straight up bailouts and state-granted monopolies) and every time we do it we feed the monster of corporatism - giving corporations and private wealth more and more incentive to control our political process.

I'm droning on now, but I trust you get what I'm saying. The 'line' should be as tight as we can make it. Government shouldn't be allowed to meddle in economic activities (other than enforcing basic justice) and private business shouldn't be profiting from government programs. They should be kept as separated as possible.

OK, I see what you mean. (finally! LOL) and I have to say I agree with you. I've almost reached a point where I've given up. I think that the corporations have gotten so much power that we will be lucky if they are reined in at all.

Thanks so much for the dialogue. It nice to 'speak' with an adult.

I've seen you posting on other threads and realize you are a Libertarian. It takes a lot of heart to continue to believe in them. LOL But hell, I'm an old yellow Democratic dog. We're used to having to get along with all kinds of folks.

 

[Wiseacre]

So dB...I'm not sure we can keep them separate. And if we don't, where is the line.

Well, we'll never have perfection, in any case. We certainly don't have a perfect separation between government and religion, but we try. The most important thing is that we share it as a value and, for most Americans, the thought of the state telling us how we must worship, or even that we must worship, is repugnant.

Sadly, we don't have the same respect for an individual's freedom to earn a living and spend their money the way they choose. The state will inevitably have an impact on the economy - just as they inevitably have in impact on religion. Government is responsible for laying out the rules that we all must follow, but that's not what I'm talking about. What I want to see effectively banned is using the power of government to decide who wins and loses in the free market. We do this in a wide variety of ways (from tax 'incentives', discriminatory regulation, etc, all the way to straight up bailouts and state-granted monopolies) and every time we do it we feed the monster of corporatism - giving corporations and private wealth more and more incentive to control our political process.

I'm droning on now, but I trust you get what I'm saying. The 'line' should be as tight as we can make it. Government shouldn't be allowed to meddle in economic activities (other than enforcing basic justice) and private business shouldn't be profiting from government programs. They should be kept as separated as possible.

OK, I see what you mean. (finally! LOL) and I have to say I agree with you. I've almost reached a point where I've given up. I think that the corporations have gotten so much power that we will be lucky if they are reined in at all.

Thanks so much for the dialogue. It nice to 'speak' with an adult.

I've seen you posting on other threads and realize you are a Libertarian. It takes a lot of heart to continue to believe in them. LOL But hell, I'm an old yellow Democratic dog. We're used to having to get along with all kinds of folks.

My compliments to both of you. With respect to social engineering, it seems to me this area ought be issues for each state to determine with no federal intervention. Maybe not entirely, but as much as possible the federal gov't needs to restrict itself to national and international problems.

 

[The Rabbi]

I have a question, and I ask this sincerely...

Is this what privatization looks like?

Depends on who's doing the 'privatizing'. Most efforts at 'privatizing' government services simply establish government granted monopolies, or various other forms of corporate welfare. The FEMA story is something along those lines. True privatizing (which almost never happens) simply involves getting the state out of providing a given service and letting others fill in the gaps as they will - or won't.

Thank you, I think you 'got' what I was trying to ask. It seems to me after reading the Brooks op-ed that the Fannies really got in to trouble when they became a for profit entity. So rather then them being a well run government agency, like SS, they became more like a for profit mortgage company and that became to root of their downfall. All that excess money without decent safeguards. It actually seems to me that we would have been far better off if it were a complete government agency rather then the hybrid it became.

It has been a for profit enterprise since 1968. It was founded as part of the New Deal. So trying to blame Fannie's problems on "deregulation" is a no-go.

The issue is that Fannie was not subject to the market disciplines of any private company. They had a presumed lifeline to the Treasury (which became an actual one, despite denials this would happen). They were not subject to the same accounting rules as other private companies. The Wall St Journal ran editorials against Fannie/Freddie for years before they actually blew up.

Get rid of them. Deep six them both. Yes, there will be temporary dislocation in the mortgage market but banks and otehr lenders will take up the slack. Subsidizing housing got us into the mess. Doing mroe of it will not help.