The standard line of many liberal bloggers on any issue that in any way involves regulation or deregulation is that the evil Bush Administration, in league with free market ideologues, has thwarted very efforts at sensible regulation of large corporations.
In the specific case of Fannie Mae and Freddie Mac, however, it appears that, among others, the Bush Administration, free market think tanks, and Alan Greenspan (and, to be fair, the Clinton Administration) have been calling for years to rein in these institutions, only to be thwarted by Congress, with Democrats especially willing to protect Freddie and Fannie from oversight and reform. See articles from the Times ("attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses") and the Post.
Kudos to any liberal bloggers who acknowledge that this particular example of corporate malfeasance doesn't follow their script. It does, however, illustrate a potential pitfall of deregulation or privatization or public-private enterprise or whatnot: never privatize the profits while socializing the risks.
I haven't found any political blogs of any stripe to be a source of stunning insight.
"There are a lot of different definitions of what a 'bailout' would look like," Sen. Obama said. "There are issues related to the short-term liquidity — can they borrow money? — versus issues related to whether the underlying assets of the two corporations are really unsound. And I think we need to watch carefully and see how it plays out before we make a decision about which steps need to be taken."
(from a WSJ article)
This is much better than a month or two ago, when he was talking about "siphoning" off Fannie and Freddie's profits to pay for various social programs. I'm hoping that the difference between his position then and his position now is a result of the influence of his somewhat moderate bevy of economists. Hopefully this indicates that he will reconsider many of his other liberal economic positions after he has a chance to discuss them with his advisers.
Imposing a tax on Fannie and Freddie's profits is actually preferred by economists. It's a classic Pigouvian tax. Fannie and Freddie's implicit government guarantee creates an externality, where the potential costs of defaulting are borne by the taxpayers, and the moderate tax on Fannie and Freddie's profits internalizes the externality.
Harvard economist Ed Glaeser, a well-known conservative, prominently praised the idea in a 2006 article, What To Do About Fannie and Freddie?. Every economist knows about the GSE externality (why do you think Republicans have been trying to distance the government from the GSEs in the first place?). Every economist also knows that a tax on the GSEs' profits would improve efficiency. It's very basic stuff.
Obama doesn't "now understand the problem" -- he has always understood the problem. Do you?
Now it is fair to ask how these two institutions got as large as they are. Government backing went a long way to bring us to this point. But certainly there are other large financial institutions that have not greatly benefited from any clearly defined government backing that would, simply based on their size alone, receive exactly the same treatment.
[EDITOR: I said many liberal blogs take this line. If you want to argue to the contrary, go ahead. If not, it's not a "resort to stereotyping," it's an "accurate generalization," properly qualified by "many."
As for me, I'll join Bernstein in waiting for a prominent liberal blogger to say, "Wow, the Dems were wrong on this one, and the Bush Administration had a point." I shall not hold my breath, however...
Instead, no one says anything about the moral hazard the Democrat leaders of these two institutions KNOWINGLY created while lining their personal pockets with millions of what ultimately will prove to be taxpayer money. Say what you want about Enron, but I wasn't forced by the IRS to pay shareholders for Skilling's fraud.
But, like I said, you won't see this story popping up all that often. Heck, I'm just happy it was so utterly blatant and such a Demcrat issue that they aren't trying to blame it on Bush, anyway.
Yet.
Harvard economist Ed Glaeser, a well-known conservative, prominently praised the idea in a 2006 article, What To Do About Fannie and Freddie?. Every economist knows about the GSE externality (why do you think Republicans have been trying to distance the government from the GSEs in the first place?). Every economist also knows that a tax on the GSEs' profits would improve efficiency. It's very basic stuff.
Obama doesn't "now understand the problem" -- he has always understood the problem. Do you?"
This might not be a horrible idea for the medium or long-term. But you would agree that it would be a bad idea right now, when Fannie and Freddie seem (to some) to be on the verge of collapse? That is the point that I was trying to make.
After all, one weighs the comments of economists differently from the comments of campaign managers.
Fannie and Freddie were careful to include powerful Democrats and Republicans as executives, board members and lobbyists to make sure they had access to top government officials and clout on Capitol Hill, no matter which party was in power.
Plenty of blame to go around, I'd say.
As to the rest of the post, is it really inaccurate to say that the Bush Administration has been seriously anti-regulation? And isn't the objective of regulation, broadly described, often to prevent the privatization of profits and the socialization of risk?
I don't claim it's always goos at this, but certainly anti-regulation absolutism deosn't even recognize the problem
Do you mean the textbook objective, or the objective of the actual actors in the process?
I don't know why you are conflating the current crisis at Fannie Mae and Freddie Mac with the problems that plagued the institutions in the late nineties and early 2000's. The current crisis is caused by Fannie and Freddie taking on a bunch of bad MBS's from the banks who were lending to unqualified borrowers and creating an artificial real estate bubble. To say that the problems (which were admittedly caused by poor management, cronyism, and lack of oversight) that Greenspan and Bush were concerned about five years ago (and were pretty much resolved) are related to the current problems is just wrong--and frankly just another sorry attempt to bash liberals.
I think it can fairly be said that there was a partial socialization of the risks when it came to bailing out Bear Stearns. And I think the same can be said when it came to bailing out Chrysler. And now, there is the bailing out of IndyMac. (Where, private depositors are getting 50% of deposits over the insured amount of $100,000.)
All this is to say that I think that this extreme idea, that we should never socialize risks that involve privatized profits, is a very bad one.
There are economies of scale to be enjoyed from large private enterprises. That is, there would be a cost to more vigorous antitrust enforcement that would prevent large private institutions from arising whose success or failure rise to the level of being a public, rather than merely private, concern. But there is also social risk that extends far beyond the boundaries of these business enterprises when they fail.
That said, there should be negative consequences for failure. But, those negative consequences should be rationally limited. We do not need an extreme principle that says we should never socialize any of the risks of institutions with private profits. Instead, we need a more sensible and moderate principle that says there should be negative consequences for failure, and positive consequences for success, and the magnitude of those consequences in either direction should be kept with reason.
We should discourage extraordinary CEO salaries through the tax code -- we should moderate the upside. And we should have some level of social insurance for companies that fail that still allows pain to be felt so as not to take the sting out of failure, but that rationally limits that pain -- we should moderate the downside.
These moderate principles, rather than these extreme principles that Bernstein gravitates to, should guide us.
There are lots of actors, as there are on all sides in public policy battles. Their objectives and motivations vary.
I think this is a good point. Textbook objectives are often not really reflective of what is really going on in the real world.
I think that this point can be especially well-deployed against economists who sometimes make simplistic assumptions about the objectives of firms.
I think that the question of what really drives people, that is ("what is really going on") is an important one that is largely overlooked by economists for some reason.
What motivates government actors is obviously also a rich area for investigation. When an individual takes action to get the ball rolling in the creation of a new regulation, what is driving them? Obviously, this is a difficult question, because it is hard to get into people's head. But, it is nonetheless a very important question.
Can we all go back to 1936 now? I'd feel a whole lot safer with the New Dealers in charge than the current crop of ideologues, left and right, with no historical memory.
FDIC insurance presents the same problem--banks and S&Ls know they can take inordinate risks with their depositor's money since they don't have the responsibility of replacing it if they lose the bet--the government (taxpayers) will bail them out. Few if any executives are ever held responsible for their bad decisions.
Here's a thought. Rather than enjoying the crash of the two lenders, how about preventing the stupid business behavior that got us to this point?
Anyhow, the answer to the disasters of free market capitalism is not more of it. The answer is less.
Sheesh.
And
This was also the problem with savings &loan "deregulation" that led to the S&L crisis and with California's electric utility "deregulation" that led to its 2001 power blackouts. It's also a problem with government contracting out functions, i.e. paying tax dollars out to contractors, with the suggestion that this is "privatization" that will bring similar benefits as real privatization. It is no such thing.
I guess the free market philosophy only goes so far--we will deregulate your market but if you get into trouble, don't worry, we will bail you out (but only if you are a favored industry giant, not a homeowner or small business). Now is time to stop the madness.