Over at the Foundry, Conn Carroll is pointing out an apparent error in Paul Krugman’s defense of the political entities doing business as Fannie Mae and Freddie Mac.
Krugman wrote in his column today that “Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago” and that “they didn’t do any subprime lending.”
Conn Carroll responds:
Where to begin? First let’s stipulate that Fannie and Freddie never did “any subprime lending” … but not for the reason Krugman states. Freddie and Fannie never do any lending: They buy mortgages from lenders only, so that those lenders have more cash to make other loans (like subprime ones). But Krugman is either lying or being intentionally obtuse when he says “Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.” The Washington Post reports:
In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.
… In 2000, as HUD revisited its affordable-housing goals, the housing market had shifted. With escalating home prices, subprime loans were more popular. Consumer advocates warned that lenders were trapping borrowers with low “teaser” interest rates and ignoring borrowers’ qualifications.
HUD restricted Freddie and Fannie, saying it would not credit them for loans they purchased that had abusively high costs or that were granted without regard to the borrower’s ability to repay. Freddie and Fannie adopted policies not to buy some high-cost loans.
That year, Freddie bought $18.6 billion in subprime loans; Fannie did not disclose its number.…
But by 2004, when HUD next revised the goals, Freddie and Fannie’s purchases of subprime-backed securities had risen tenfold. Foreclosure rates also were rising. …
In 2003, the two bought $81 billion in subprime securities. In 2004, they purchased $175 billion — 44 percent of the market. In 2005, they bought $169 billion, or 33 percent. In 2006, they cut back to $90 billion, or 20 percent.
Let’s review that last paragraph again. Krugman is trying to convince his readers that Freddie and Fannie are only innocent bystanders in the housing bubble. Fannie and Freddie purchased 44 percent of the subprime securities in 2004. Does that sound like the behavior of an innocent bystander to you?
Fannie &Freddie are private companies, listed on the NYSE, and should be allowed to fail. They are the only private companies, apparently, that the Federal Govt. has guaranteed against market failure. The Bush Admin. proposal to offer them cash through the Federal Reserve and through the purchase of stock in F &F is the first step toward eventual nationalization of the secondary mortgage market.
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.
The volume of "subprime" or "near-prime" securities Fannie and Freddie purchased is a bit misleading, because they avoided the most dangerous types of mortgages in the subprime market.
This is definitely true, and it is because of the stringent set of representations and warranties Fannie and Freddie insist that commercial and investment banks insert in any securitization agreements, even though Fannie and Freddie are almost never directly party to these agreements (but the banks have them in mind as buyers of the mortgage backed securities).
With the GSEs we can say "...but for 17 basis points?"
(That's the sum total impact on mortgage lending, for all the billions of cash moved, trillions of notional guaranteed, and tens of millions of executive comp wasted.
Now perhaps Market Ticker is a crackpot, but if he's right Krugman is seriously misrepresenting what went wrong.
News to the airline industry.
The only thing interesting about Krugman is how he manages to continue his masquerade as an economist who reports on politics when he is the opposite.
Checking on wikipedia I see that Krugman is dead on about the definition of a subprime mortgage.
Thus, as he says straight out in the article, they can not have bought subprime loans. I suspect the washington post piece is mistakenly applying the standard meaning of subprime loans as being those that charge interest less than the prime rate (for some period). Still this is merely a matter of terminology the real question that needs to be answered is whether Fannie and Freddie bought a large portion of the loans that could obviously not be repaid by the borrowers without refinancing or sale.
I agree that Krugman doesn't give good reason to think that they did not do so, defining Fannie Mae and Freddie Mac not to purchase subprime loans doesn't actually mean they can't purchase bad loans, but nor is it the case that observing that they bought many low interest rate loans enough without more data on what type of loans what sort of downpayments were involved what the relevant credit scores and incomes were and so forth.
First of all the problem with sacking the executives to teach them a lesson/punish them is that the people who you teach a lesson no longer run the show. Of course you might think this will encourage the next generation of leaders to do a better job but whether or not that is true depends largely on both the reason bad decisions were made and the types of compensation packages offered.
I mean there are really two possibilities here:
A) The leadership of Fannie Mae and Freddie Mac deliberately pursued policies they knew were harmful/bad for their own personal gain. I tend to doubt this but it's possible. Now in this case I agree the executives need to be treated as harshly as their contracts will allow and if evidence can be found of their deliberate intent to make bad choices possibly sued for breech of fiduciary duty or some such. However, what's really important in this case is to change the system so it's not so easily gamed, i.e., reduce the performance bonus or other incentives that bias the executives toward achieving high numbers via risky strategies.
B) The executives at Fannie Mae and Freddie Mac simply made mistakes much like the executives at many other banks. Now perhaps this is evidence that we didn't have good executives in the first place but since so many people fell for this trap one has to ask whether we really think we are likely to get better replacements. In this case what matters is who is least likely to lead us into trouble again. Unless we are using a new selection process to hire new executives I see no reason to expect they will be any better than the current executives and the current executives will at least have the advantage of this experience to make themselves cautious.
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Now I understand the outraged feeling at seeing the executives raking in huge contracts during the good times and escaping unscathed during the bad but adopting a compensation policy that inflicts significant economic/professional loss on the executives as a consequence of massive failure would just make things worse. Consider that the very feature we want in our executives is prudence. Ideally we want to hire executives who take safeguards against downturns when times are good and avoid the executives who are inclined to gamble everything and escape before things turn sour. By making the executives pay when things go bad you discourage prudent individuals from taking the job more than the risk takers.
Is France, according to your extremely broad definition of socialism, socialist?
If so, what does it mean to say that France "doesn't work?"
It tends towards the extremely simplistic. It substitutes broad labels (i.e. socialism) which encompasses many different things (i.e. the military? the post office? social security?) and applies a simplistic normative label (i.e. socialism bad -- query? post offices bad? social security bad?)
And conservatives wonder why they are "underrepresented" in academia. Well, the reason is simple. In academia, you actually have to have arguments that can be defended using basic logic and reason, and which do not excessively distort reality with simplistic assumptions (the exception being economics, which actually encourages simplistic and false assumptions that destroy nuance in a bizarre and ultimately futile desire to imitate the elegance of physics).
There are intelligent conservatives in academia. But, I think that the ratio of intelligent to unintelligent conservatives is much lower than the ratio of intelligent to unintelligent liberals. Thus, all things being equal, one would expect more liberals than conservatives in academia.
It amazes me what passes for "thought" among some (but definitely not all) conservatives.
Maybe I would be concerned about "discrimination" against conservatives in academia if conservatives were, on average, more intelligent.
It also appears to me that intelligent conservatives (like Eugene Volokh at UCLA or Charles Fried or Jack Goldsmith at Harvard Law School) do not have excessive difficulty obtaining academic positions at or near the highest levels of the profession. (I will exempt any professors from George Mason Law from the analysis, since that school definitely discriminates in favor of libertarians.)
If academia were so unfair to conservatives, how do you explain the conservatives who do make it?
I will tell you how you explain it. Smart conservatives do fine. There just aren't as many of them, compared to their numbers in the general population. It is not that you cannot be highly intelligent and conservative. It is that this combination is more rare.
(And no, saying "conservatives are stupid" doesn't count as a fact, no matter how many times you say it. And yes, socialism has a lot to answer for, given the history of the 20th century.)
I would really like to have a word with this "socialism" character.
Um, on second thought, never mind.
This is exactly what is wrong with conservative thought. Always trying to "boil things down" instead of accepting that the real world is a complex place.
There is no such thing as "socialism," really. At least, it is not a discrete entity.
It would be as if I were to say, Starbucks really has to answer for the Enron scandal, because Starbucks is "capitalist" and so was Enron.
That really is not the right level of analysis. That level of analysis has the advantage of being simple. Unfortunately, it has the disadvantage of not usually being all the useful.
The military is socialist. And so is the post office. And so is the FDIC. And so is the institution of public police officers and public prosecutors. So is Amtrak. So is social security. And so on.
These things are not usually usefully clumped together. At least for the kinds of conclusions that conservatives wish to draw.
i.e. It doesn't make sense to say that Amtrak has a lot to answer for, because Stalin killed a bunch of people.
Krugman and other academic economists directly or indirectly benefit from federal spending, and they are rightly worried the gravy train might disappear.
Back on topic: isn't "Krugman error" a redundant term?
It was beautiful, wasn't it? I'm bookmarking this thread.