By L. Randall Wray
In recent weeks the wingnut right wing ideologues have made a lot of headway in their goal of gutting Social Security. Well-funded by hedge fund manager Pete Peterson as well as right wing Washington think tanks, they have promoted the preposterous notion that our wealthy and productive economy cannot afford to take care of our elders. Now they have turned their sights on Fannie and Freddie. They argue that it is time to cut Uncle Sam out of the home mortgage market. Just as he has no role to play in providing decent pensions to our retired population, he should not help make homeownership affordable for most Americans. “Free markets” can do it all so much better than Uncle Sam can do.
Give me a break. These are the same bozos that are promoting home foreclosure and happily cheering the biggest transfer of wealth to Wall Street that the US has ever seen. Without Fannie and Freddie there would be no home financing or refinancing going on right now. Oh, right, free markets did such a good job with the subprime mortgage market, creating a global financial crisis that rivals the Great Crash of 1929. Hey, let’s reward them by getting government out of the mortgage markets so that Pete Peterson can run the whole shebang for the benefit of Wall Street. That, of course, is the real goal. Wall Street wants to get back to predatory lending as quickly as possible, and hates the competition from a newly missioned Fannie and Freddie—which have turned away from the practices that assisted rapacious private lenders from 2004 to 2008. Better close them down because Wall Street hates competition.
And, yes, let’s reduce Social Security benefits and raise payroll taxes, squeezing our seniors so that they have no choice but to let Pete Peterson charge them exorbitant fees to manage their miniscule life savings. Government is running out of keystrokes and won’t be able to afford to credit retiree bank accounts fifty years from now. Better slash Social Security now.
Ain’t it all just so convenient for the Pete Petersons of the world? Shift the blame, no matter how ridiculous the claims. Our current problems are caused by runaway Fannie and Freddie and Social Security—providing safety nets that our homeowners and seniors abused, taking advantage of poor little defenseless Goldmans and Morgans and Citibanks. That was the cause of the crisis! If we had just had more free market abuse of consumers, everything would have just been fine. Besides, government is broke. We’ve got to tighten the purse strings. Running out of cash, you know. No more keystrokes to credit bank accounts.
How about a reality check? Fannie and Freddie made no subprime loans. Indeed, they originated no loans at all. Yes, they offered insurance on privately originated mortgages, and yes, they lowered their standards. This has been carefully studied, and all analysts have reached the conclusion that Fannie and Freddie got into trouble because they catered to “free” market demands that they either insure the kinds of toxic mortgages markets wanted to provide or that they become irrelevant. The free markets wanted to do Liar loans and NINJA loans, making loans that borrowers could never service. The old fuddy duddies Fannie and Freddie would never have agreed to guarantee this trash, so they were partially privatized, with big gun, high paid CEOs hired. And just like magic, they started behaving like a Goldman or a Countrywide—maximizing CEO pay while damning the firms. Yes, that is the free market solution and my colleague Bill Black calls it control fraud. Fannie became a control fraud, just like all the big boy private financial institutions. Peterson’s solution? Promote control frauds by freeing markets.
The thing that the wingnuts cannot explain is why Fannie and Freddie—which had a history that goes back to the mid 1960s – did not encounter significant problems until they were directed by Congress to replicate a market-oriented strategy. And the wingnuts cannot explain why defaults on home mortgages were so rare until the “free markets” took over the mortgage sector. Heck, Fannie and Freddie even survived the savings and loan fiasco of the 1980s, when thrifts were “freed” to pursue free market maximization that resulted in suicide for the whole industry. It was only after 2004 when Fannie and Freddie were directed to cater to control frauds like Countrywide that they got into trouble.
Make no mistake. The wingnuts are likely to win these battles. President Obama will not put up a fight—he’s already bought the Peterson story, hook, line and sinker. Social Security is a done deal. It is going to be “reformed”. That is, it will be handed over to Pete Peterson, who will manage it right down the rat hole where all the private pensions are going. Wall Street will gamble away all the funds, whilst enriching itself with management fees. And Fannie and Freddie will be shut down so that Wall Street will have free reign in the housing market. Homeownership rates will plummet. Predatory mortgages will be the rule. Wealth will trickle up. Democratic Party coffers will be replenished. Obama will declare Social Security and Fannie and Freddie to be reformed—just like the healthcare system.
The only possible hope is that financial markets completely collapse in the next three to four months. That would discredit Pete Peterson and the wingnuts at his think tanks. It would make it possible to stop the right wing stampede and the collective amnesia about the last three years—that is, about the global financial crisis caused by free market wingnuts. Resumption of the crisis could discredit the crazy troglodyte thinking promoted at Chicago and Washington think tanks.
What is the free market path to homeownership? A subprime crisis.
What is the free market path to private pensions? Across the board collapse of commodities, real estate, and equities markets.
What is the free market alternative to Social Security? An impoverished elderly population.
What is the free market alternative to Medicare? High priced health insurance that most elderly people cannot afford.
Not to worry, all these reductions of government interference into the finely oiled free market machine will help to enrich Pete Peterson and the other funders of the wingnut think tanks.
Ok, how about a politically feasible alternative? We all know that Pete Peterson’s well-funded effort has convinced most policy makers that the federal government has run out of money, so cannot afford costly Social Security or government guarantees of mortgages. Any federal spending must be offset by tax hikes or spending cuts. Pete Peterson’s minions are fond of “infinite horizon” calculations that show that “government entitlements” will lead to shortfalls of tens of trillions of dollars. It is all nonsense, but it guides all policy making.
So here is a proposal consistent with such calculations. Let us raise Social Security benefits today to help seniors through the current depression. Let’s have a payroll tax holiday—stop collecting the taxes from employers and employees to put more pay into the hands of workers and to reduce the costs of employing them. Let us provide debt relief to homeowners so that they can keep their homes. Let us create a jobs program to put 12 million people back to work (the number of jobs created by New Deal programs).
To please the deficit hysteria crowd we will need to offset all of this spending. So let us propose that beginning in 2050 all seniors above age 65 will be ground to produce soylent green burgers, with a proviso that implementation can be postponed by majority vote of the population annually from 2050 on. For budgetary purposes, the future savings to Social Security and Medicare can be counted today, eliminating Peterson’s infinite horizon unfunded entitlements. Voters in 2050 and thereafter can decide whether they want those burgers—year-by-year so that infinite horizon forecasts will remain favorable. Each year voters will decide whether they want to eat seniors or feed them for one more year.
Personally, I don’t eat mammals, but I won’t be voting in 2050. Now, reptiles are an entirely different matter, and only discretion prevents me from naming a few that could be candidates for reptilian burgers. Bloodsucking vampire squid cakes, anyone?
Heck, no matter what we do today, it will be voters in 2050 that will decide the fate of seniors in 2050. That is what scares the Beetlejuice out of Pete Peterson—he’s afraid that American compassion and reason will triumph, hence the scaremongering to convince voters that retiring babyboomers expecting government to credit their bank accounts using keystrokes represents the biggest threat facing America today. And that is why the wingnuts think it is so important to start cutting benefits and raising payroll taxes today—to eliminate America’s most popular government program so that no one will have any alternative to Wall Street management of pensions. Yes it is unimaginatively silly—the agenda of simpletons who have no understanding of balance sheets or of sovereign currencies or of anything else that is important to the issues of Social Security or government guarantees of home mortgages. Unfortunately, these are the most dangerous kind of simpleton—with billions of dollars to throw around to get their way.
Remember Thatcher’s motto: TINA = there is no alternative to free markets. The wingnuts have learned these lessons well. Remove any alternative to Wall Street’s complete control over all aspects of life. Then TINA will be true.
I do not want to be accused of being unfair to wingnuts. There is certainly room for debate on the necessity of reforming Social Security and government guarantees of mortgages (and student loans, and small business loans, and farm loans, and veteran’s loans). One can coherently—even if repugnantly—argue that government should play no role in helping to provide seniors with a decent living standard. Declaring that any senior who is not sufficiently lucky, industrious, and foresighted to provide for her own retirement ought to live out a miserable old age is an opinion that deserves to be debated. But declaring that government simply cannot afford current law Social Security benefits it just plain ignorant—it is a position that deserves no attention. Siding with Wall Street against government protection of homeowners might be an unpopular position but it is, again, worthy of debate. Yet claiming that Fannie and Freddie as originally constituted would have contributed in an important way to the global financial crisis does not merit consideration. It is not even worthy of Fox News. It is beyond stupid. It is an outright misrepresentation of the facts.
You have a very brilliant sense of humour(Blood-sucking vampire squids).Unlike most of the left, you actually bring ideas to the table, and you aren't afraid of the wingnuts (Stiglitz coined the term free-market fundamentalists, but i like this one equally as well). Keep it up.
Sorry, commentators. I know that several people commented, and I saw the comments. Through some glitch I do not understand, when the revised version of my piece was posted, the comments disappeared.anyway the main comment was that the GSEs do need reform. I agree. We need to get all vestiges of privatization out of the GSEs. They should be fully nationalized, run on the government's books, no funny accounting, explicit govt guarantee, civil servant pay for all employees, and draw and quarter any GSE employee who does not act in the public interest. LRWray
To please the deficit hysteria crowd we will need to offset all of this spending. So let us propose that beginning in 2050 all seniors above age 65 will be ground to produce soylent green burgers, with a proviso that implementation can be postponed by majority vote of the population annually from 2050 on.Now that's thinking outside the box, but I'd take it another way; its like Thomas Edison said, "If the Government issues bonds, the brokers will sell them. The bonds will be negotiable; they will be considered as gilt edged paper. Why? Because the government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit."Public debt is always compared to GDP (neatly confusing stock and flow) but its never compared to our public assets, namely our human capital. Like Protagoras said, man is the measure of all things and fortunately the Government has already done most of the math for us. The EPA and OMB have put a value of $7 million per statistical human life and and the 2010 Census will probably come in around 310 million American residents.$7 million x 310 million = $2.170 quadrillion (that is, $2,170 trillion). Of course once you subtract the $14 trillion in public debt, our net public assets fall to $2.156 quadrillion.I suppose a ticking "public asset clock" would require an awful lot of zeroes and with 1% annual pop. growth, would increase by nearly $22 trillion a year.
Beowulf that is a brilliant calculation.
The arguments for reforming Fannie Mae and Freddie Mac and for reforming Social Security are distinct. I do not consider myself a wingnut, however I strongly see the need for government to disentangle itself from the homeownership process. However, I see government having a central role in creating safety nets in society for those who have none.The U.S. has made a policy decision that widespread homeownership is desirable. While I disagree, the policy has dictated a number of steps in the tax code and through agencies of government to make homes "more affordable." Eventually, the equilibrium home prices adjusted to these government programs so homes are just as affordable as if these programs never existed. To maintain the status quo policy requires more and more government support. Maintaining government support levels will act counter to the policy of widespread home ownership so it is a quandry.
I see wanting the government out of the home lending market as much different than the social insurance issues raised by proposed limits on medicare, medicaid, or social security. Encouraging home ownership versus renting is just a popular decision made to buy middle class votes. It has no real connection to social utility or justice beyond this questionable idea that home ownership makes for better communities or citizens.
I don't see the point of Fannie and Freddie. Before the 80s, you could argue that there were a lot of creditworthy borrowers, and a lot of knowledgeable loan officers at local banks with limited access to capital, and the Fannie/Freddie government guarantee assisted securitization programs helped mortgage dollars flow to the best use. But computers put the local loan officer out of business, most loans are made by too-big-to-fail national companies, and even when they weren't, now every local bank can securitize without government assistance. I fail to see the social purpose of the FHA allowing people to buy Manhattan condos with no money down – http://bit.ly/bcqLr3 .
I want my government to stop propping up Fannie and Freddie with my tax money so that house prices will FALL so I can buy a home. I've been saving up for 15 years, but house prices are still too expensive. Let home prices fall! The 300 or so government programs promoting "home affordability" have only served to inflate home prices and make the intermediaries rich.
p.s. Why is my tax money being using to prop up the price of Fannie and Freddie bonds so that investors don't take losses? Let the bond holders take the haircut that they deserve. They made the poor investment decisions. It says right there in bold letters on the first page of every Fannie and Freddie MBS that the security is not an obligation of the goverernment.
"Fannie and Freddie made no subprime loans. Indeed, they originated no loans at all. Yes, they offered insurance on privately originated mortgages, and yes, they lowered their standards."Minor quibble – I do not believe that Fannie/Freddie ever lowered their standards for insuring prime loans (except expanding coverage of jumbo loans in high cost areas). As far as LTVs and DTIs go, conforming loans were the same as they ever were. Where they lowered their standards was in the purchase of private label MBS to hold for their portfolios.
My only real objection is your continual use of "Free Market" when you mean corporate socialism, or something like the Russian Oligarchs after their collapse.There are all kinds of government barriers to entry for all these financial products. Then there were the ratings agencies that would label the worst MBS AAA – but not have any responsibility for the fraud. Nor could an honest rating agency get in.No truly free market would make NINJA or Liar's loans – please explain why anyone would risk their own capital (not the taxpayer's)?In a truly free market, frauds are prohibited, including and perhaps especially control frauds. When people do stupid things, the lose, not get TARP money.So what you are talking about is socialism for the little guy, and taxpayers at the taxing end, and wild west, hell-on-wheels, lawless market for the little guy. Calling that a "free market" just adds to the semantic confusion.I believe in the "free market" as the Austrian school would define it, not these monstrous corruptions you use above, but if we are going to be socialistic, we need to be fully socialistic as any hybrid is worse than either.Social security is a ponzi scheme and is about to go bust. I assume as an economist you can do simple calculations but I may be wrong – the number of retirees, the number of workers, the amount required…The money I've paid in taxes all my life has been spent and no longer exists, but conveniently masked the deficit. The only difference with the privatization you suggest is that Wall Street will be wasting it instead of Congress.But there is still the problem of funding. I would love to make every disabled and elderly person alive today comfortable. I can't. I don't think we can do so even collectively and maintain all the junk programs (museums, national parks, moon or mars shots – we are even crippling weather satellites for lack of funding), maintain the empire – what IS the carbon footprint of the military?, and also do this.The only wealth government has must be taken from someone else first. Wall Street might be a good target, but they can pay lobbyists to make the flow go the other way. Stop the payroll tax and replace it with what exactly? Cash in the non-marketable bonds in the "trust fund"? Sell more treasuries to china? Go Weimar-Zimbabwe?Or just look at the corrupt corporatist Medicare part D – they can't bargain to reduce prices so big pharma wins.And the supreme court has said I don't have any claim nor ownership in social security – the money is a simple tax which congress can spend or change at its whim. It isn't insurance.We had the VA and Ginnie Mae and they seemed to work. Fannie and Freddie WERE NOT GUARANTEED by the taxpayer, and we need to let the free market work here – those stupid enough to give cash to these government granted corrupt oligarchs should lose most of their investment. Lets start there – please call for this if you believe in it.Then we can discuss if homes are proper to subsidize or guarantee – should the new Freaky Mock be an exchange, insurance company, broker, all, none, or something else.I'm with Ron Paul on the free market – but as he said in his campaign, why is it when anyone suggests cutting government they say the first thing is to end social security. No. The goal might be the free market, but like any other serious addiction, one must come down slowly and carefully and honor the most important promises – which would include those to the elderly. But the system is unsustainable, so we need to get to something which will be. We should have done so 30 years ago.Japan had/has postal savings accounts which pay little but are completely safe. Unlike social security, they are owned by the person sending the money in. I don't want money for retirement or disability to go into a black hole in either washington or wall street.
Mr. Wray, your comments are always so subjective. You write with a big chip on your shoulder. It might help if you to tried some objective thought. Read an Ayn Rand book or two. It might help. BTW, the free market Austrians believe that the major advantage of a free market system is its morality. Money is not taken by force from one entity and given to another. Personal property is respected. Who knows? You might even learn to like meat.
please check your "facts" on subprime. FRE/FNM were the largest buyers of subprime debt. The funded the market heavily and were/are/remain at the center of the capital misallocation in the housing market. That misallocation has ruined people's lives. Those GSEs were created to get politicians elected, not help housing. Renting works just fine without GSEs.Social Security would be fine if there were actual savings invested behind it. There aren't. Hmmm. Wonder why the US has such a low savings rate?You can scoff at free markets all you want, but they have produced tremendous wealth and lifted billions of people from poverty. No other form of organization comes close. Check india and china for changes in policies that dramatically improved living standards. I am sure you figure that their socialism wasn't as smart as yours, but you need to spend some time thinking about why the US is so rich before you go and change it around.
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This article is loaded with so many subjective derogatory comments regarding those on the political right that it is difficult to get to the substance of the argument. To the extent that the author believes that Fannie and Freddie bear no responsibility for the housing/mortgage crisis and its terrible human and financial fallout, the argument is simply not credible. Fannie and Freddie are major instruments of federal government policy to promote the goals of home ownership. Home ownership may be a noble goal, but the massive market distortions caused by Fannie and Freddie resulted in yet another case of a government programs good policy intentions resulting in additional misery. The system clearly overheated and produced massive asset bubbles in the real estate market. When the markets corrected, which they did very quickly, the most marginal of homeowners were devastated and other homeowners paid and continue to pay a heavy price (of course, subsequent buyers have benefitted). Fannie and Freddie were an obvious part of a system that promoted and permitted those who were not qualified to own homes to own them, and permitted others who would otherwise put more capital into their homes to put less in them. The greater margin, combined with low interest rates, resulted in a massive bubble. For their part in the contributing to the market distortion and crisis, these entities should at a minimum be massively reformed and downsized. Perhaps, they should be privatized or eliminated. This appears to be a mainstream or moderately conservative view, but for purposes of this issue, I guess you can consider me to be another “wingnut.”
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