Regulating Fannie and Freddie

For years now I have advocated what I regard as modern Socialism: harnessing competition in the public interest.

The state should set parameters for markets to ensure truly free and effective competition, i.e. competition based on quality and price, not on (semi)monopolistic price-setting, child labour etcetera. The more essential certain services are to the economy or to non-calculable values of the nation, the more the state should guarantee that they are fairly accessible to everyone. Examples of such services that couldn't or shouldn't function on a cost-benefit basis are policing, telephony or education.

Members who do not share this view will at least share with me the need for regulation. No market could ever function without regulation. It is no surprise that the champion of free markets, the United States, has introduced some of the toughest anticartel laws in the world. But do they work? And if they don't work, then why is that?

In short: what is fair and efficient market regulation, and how do we implement it?

Let's take Fannie and Freddie as example. I would take an example from my own country if everyone on the Org read Dutch, but that isn't the case and there is a lot of English-language info on F & F available which makes discussion much easier. Besides, I am fascinated by the Fannie and Freddie case.

This article breaks down the essential issues nicely.

Whenever the mortgage finance giants, Fannie Mae and Freddie Mac, find themselves in a tough spot — and boy, are they in a tough spot now! — they always seem to find a way to blame their problems on “the mission.”

“We exist to expand affordable housing,” says Fannie Mae on its Web site, and although it also lists its other mission — providing liquidity for the American housing market — it is the former that has long been the companies’ trump card.

That mission of creating affordable housing is the reason that Alan Greenspan, the former Federal Reserve chairman, could testify, year after year, that Fannie and Freddie had become so large, and took so much risk, that they could one day damage the nation’s financial system — only to be utterly ignored by the same members of Congress who otherwise hung on his every word.

The mission is why the two companies were able to run roughshod over their regulator for years, and why the Bush administration was unable to rein them in, even after an accounting scandal.

The mission is why their two chief executives, Daniel Mudd at Fannie and Richard Syron at Freddie, could take home a combined $30 million last year, while presiding over one of the great financial disasters of all time, posting billions of dollars in losses with no end in sight.

The U.S. government has entrusted these two companies with the 'mission' of making affordable housing available to all Americans. This is essentially State Socialism: a (semi)monopolistic company is required by the government to meet policy goals and in return for that it gets all sorts of tax and regulatory breaks from same. The result has been as desastrous as those of State Socialism everywhere in the world. Corruption sets in and the reslt is the opposite of what was envisaged by the policy:

That would be hard enough to swallow if the cause had, in fact, been the companies’ willingness to finance low-interest loans to working-class home buyers. But the real reason was greed. [..] The problem is that while the two companies are still called government-sponsored entities, they are also publicly traded corporations. And for much of the last two decades, they have been hell-bent on growth, the clear goal being to push up their stock prices.

The net result is that the U.S. governmnt is now dependent on these self-created monsters:

[..] given the paralysis in every other sector of the market, the country badly needs Fannie and Freddie to do what they are chartered to do: “wrap” loans so that banks will keep writing mortgages. That’s why Congress recently passed a law that allows Fannie and Freddie to insure mortgages up to nearly $625,500, from the previous limit of $417,000. That’s also why the Treasury is now taking pains to ensure the marketplace that the companies will not go bust, even if it means a government takeover.

My conclusion is that private companies can and should never be burdened with public responsibilities. It is a recipe for fraud, malpractice, policy failure and financial disaster.

So my question is this: How do you regulate a market in the public interest without burdening the parties with public responsibilities? How do you make markets work in the public interest without any of the market parties working in the public interest? I have some thoughts on the matter, but I would rather hear other peoples' views unobstructed by my assumptions.

The author of the article has as idea:

You want to know the truth about “the mission?” The country doesn’t even need Fannie and Freddie to help with affordable housing. Several laws mandate that banks reinvest in the communities in which they operate — and that mandate has come to be defined largely as making loans available for affordable housing. Several executives involved in community-based banking told me that Fannie and Freddie actually refused to buy those mortgages — they weren’t profitable enough. (A spokeswoman for Freddie Mac denies this.)

Are such mandates the answer to my question?

This is a very complicated subject, but the main premise is that people with poor understanding of household budgeting and money management, volatile employment situations, and the unrealistic attitude and desire for instant gratification leads to financial bankruptcy and disaster.

Home ownership is not for everyone. The basic progression used to be that one had to have about 20 percent of the cost as a down payment, and your monthly mortgage payment could be no more than 25 percent of your income. Under these restrictions most families began home ownership in lower priced "starter homes", usually smaller & older fixer-uppers. As they built equity and had children they sold off the starter home for a small profit and bought into a bigger/better one as their family situation required.

Now, it seems, many have gotten away from this. Everyone wants and expects to start out with a McMansion, and can't afford the 20 percent down payment for a $300,000 to $500,000 mortgage, so they put down much less, pay a higher monthly rate...and get in way over their heads.

Banks and mortgage companies are also to blame, primarily out of greed and ignoring the basic principles of intelligent lending practices. Offering adjustable rate mortgages to risky creditors who have to struggle to pay basic living expenses is taking advantage of the financially challenged at it's worst. These financial Machiavellians then bundle the bad loans into "investment packages" that are sold off to other investment groups, banks, mortgage companies, pension investment groups etc... so that the originators of this bad debt make their profit with none of the risk.

The best way to stop this is to mandate that mortgage lenders must hold a large percentage of this high risk debt and not be able to pawn it off. Regulation...yes indeed.

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Originally Posted by Adrian II

So my question is this: How do you regulate a market in the public interest without burdening the parties with public responsibilities? How do you make markets work in the public interest without any of the market parties working in the public interest? I have some thoughts on the matter, but I would rather hear other peoples' views unobstructed by my assumptions.

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IMO, you have to separate the issue into two parts. The first part is the usual market thingy, which is completely private. Then there is the second part, which exists to serve those in need for various reasons, and that one have to be completely under government control, and of such a nature that it won't conflict with the private part.

Trying to merge the two into one privately owned but government controlled entity is doomed to fail, as you said and as we have seen the last year.

Sorry for the very brief reply to a big question, but no time for a longer one right now...

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Originally Posted by HoreTore

IMO, you have to separate the issue into two parts. The first part is the usual market thingy, which is completely private.

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That's the part I am on about. It can never be completely private, you see.

The 'usual market thingy' is always a carefully constructed institution, ruled by laws set by society and by customs set by the participants themselves. It must be, for without any enforcement of these there would be no market thingy at all. There would be anarchy. This rules and customs thingy is the very principle that allows markets across the world to operate, from Wall Street to the Beijing flea market.

So how exactly do we regulate this market thingy to make it work in the interest of policy goals that society considers necessary or desirable, but without impeding either fairness (i.e. fair competition) or the profit motive of market parties?

My example is clear enough, right? The U.S. government wants affordable housing for people with a minimum income of 'X'. Since the U.S. government does not want to take upon itself the role of mortgage bank, it seeks to regulate financial markets in such a way that mortgage banks wil fulfill this target.

Now this target has obviously not been fulfilled by the U.S. government getting into bed with Fannie (or with Freddie, if you are a Republican) because the result has been fraud, waste, corruption, lack of transparency, or some exotic combination of all of these.

Such wishy washy arrangements just don't work.
To begin with, the favoured companies get preferential treatment, which in itself already impedes healthy competition.
Secondly, these companies are not bound by realistic, measurable targets, but by a vaguely formulated 'mission'.
Thirdly, because they are unduly important both to the government and to the wider financial institutions of the country, these companies get away with incredible lapses of oversight until it is too late to avert disaster.

So that's not the way. 'Regulation' and 'oversight' in themselves are not enough; this has been proven by the F & F deconfiture.

What sort of regulation, and what sort of oversight are needed? This is not just a Socialist issue. Every modern world view from Libertarianism to Catholic Restauration is confronted with it, because every world view presupposes some sort of regulation of economic life, preferably one that works in the interest of their preferred type of society.

P.S. I know this is not going to be a popular thread and most people are probably bored stiff by it. But I would appreciate it if trolling and such were kept to a minimum. So far so good by the way. :bow:

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Originally Posted by Adrian II

So how exactly do we regulate this market thingy to make it work in the interest of policy goals that society considers necessary or desirable, but without impeding either fairness (i.e. fair competition) or the profit motive of market parties?

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A challenging thread, indeed. :bow:

My own view is that we are regulating the wrong things, in the main. That is to say, I would offer that markets become most disfunctional when two attributes remain unregulated: size and accountability.

A market works best when its processes are transparent to most. Whilst markets will always have the characteristic of the herd, when sufficient knowledgeable traders participate, there will be many views to follow and/or shape the market behaviours.

Nowadays, we have vast and globalised corporations driving all markets. Not only these organisations specifically protected by outdated laws from the consequences of risk, they create monopolies (or small oligopolies) through obfuscation. In simpler terms, they change the rules to suit themselves and confuse others.

The modern drive for privatisation has also created the chimerae oft in charge of essential utilities. These are de facto monopolies - the illusion of choice has been created but in reality, they either operate as cartels or as actual monopolies. This has been done on the basis of a now unchallenged article of faith: private sector good, public sector bad. Both being organisations of people, there is no inherent reason why this should be so. As it suits politicians to have scapegoats, the past thirty years have shown a preference for divesting responsibilites to the private sector - and as the sweetener, a blind eye turned to the consequent profiteering; only sometimes overseen by a toothless regulator. Certainly the public sector in most countries had atrophied to the point of calcification - but surely the solution was to bring appropriate incentives and management to bear, rather than vilify and unload essential services?

Monopolies make a mockery of markets. They rapidly become as lazy and calcified as the publicly owned facilities they were meant to replace. Often, as they approach failure, they cannot be allowed to embrace it, and the taxpayer ends up securing not only the original costs but propping up the profiteering as well. A truly Faustian bargain, but we do so love it.

There is also the crisis of modern conservatism. To me, a conservative is one who values traditional values and the concept of duty. There is also a healthy distrust of government where unneeded, but a recognition of the important role of the state in ensuring all can go about their business. Developing a business requires stability, and an equal opportunity for good ideas to flourish within the rule of law. Unfortunately, my kind of conservatism is long dead. This who style themsleves so these days cling to the singular idea that government is always bad - and the tragic corollary which is therefore, private is always good. Instead of a functioning market, they require only the semblance of a market, unblemished by state intervention. As modern socialism finds itself unable to break free of the desire to intervene in every aspect of the citizen's life, its ascendant shadow strives to intervene not at all.

As noted, markets cannot function without law. Yet incorporation removes (in most countries) a great deal of the burden of law from the compnaies so constituted. Corporations are in law, individuals, but individuals free from prosecution in so many instances because the actual individuals (the human ones) are not, in law, often culpable.

This goes further to the nub of accountability. If one starts a small business, and it fails, one is likely to lose a great deal - including perhaps the house you used to secure the initial loan. Bankruptcy and ruin lurk in one's shadows. This is real risk, with real consequences, and the successful deserve their success. Yet above a certain size - and incorporated - one can risk an unimaginable amount of money, even to ruination of the company, yet leave the scene of destruction with a handsome payout - and invariably a new post running another company.

Clearly something is wrong. Risk does not carry accountability in these rarefied atmospheres, and consequently the market does not work on the men and women employed therein. This has been seen most acutely in the current banking crisis. Financial derivatives - essentially new games of chance concocted by people who hope that no-one else will understand the rules - have grown in such complexity and idiocy that often even their creators lose track of what they are doing. The really clever see far more reward in the stock exchange casinos than in the mundane business of regulation, so whilst even other financiers are struggling to understand what is going on, the poor bumbling non-entities left to regulatory duty are way beyond their depth. Let's not even consider the inadequacy of the functional illiterate that is invariably wasting space as Finance Minister.

Small is beautiful, as a wise fellow* once wrote. We should get rid of the concept of chartered or incorporated status ('twas instigated by Elizabeth I as a method to legitimise piracy by her favourites, and has trod that bountiful path all the days since).

We should utilise law (and international law for a globalised market, which is a whole new subject) to set the stable boundaries for business. We must recognise the essential and noble duty of government to enforce that law (and the enormous contribution that the state makes to ensuring business can flourish, such as EA noted in another thread, i.e. picking up the social costs of their decisions - for which, it should be noted, most corporations repay the state by avoiding the majority of their taxes).

Company bosses should be personally liable for all losses incurred by the company - if this leads to the hoary old complaint that no-one will do the job, then so much the better. Corporations will wither. I can assure such complainers that many small entrepreneurs, always willing to take such risk, will fill the gap and competition and innovation will once again flourish.

Essential services should be taken back into public ownership and the concept of public service as a high calling re-established - through draconian culling of the current incompetents, and implementation of the best of organisational theory - including imposing accountability on public servants.

Fannie Mae and Freddie Mac are exemplars of pretty much every wrong-headed characteristic of business I have excoriated above. No wonder they are crumbling. Yet we will soon forget as the masses are given more shiny things to distract their attention. I would have the responsible politicians and board members stripped of everything they own and made homeless in the same curt manner as those dumb proles they conned; pour encourager les autres, you understand - and we just might see the beginnings of a real functioning market economy.

Spoiler Alert, click show to read: 

E.F. Schumacher, in case anyone is interested in his essay of the same name.

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Originally Posted by Adrian II

What sort of regulation, and what sort of oversight are needed? This is not just a Socialist issue. Every modern world view from Libertarianism to Catholic Restauration is confronted with it, because every world view presupposes some sort of regulation of economic life, preferably one that works in the interest of their preferred type of society.

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Catholic Restauration is a new one, I must admit. Is that the movement where bistros serve bread that one is told earnestly is really something else? :wink:

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Originally Posted by Banquo's Ghost

We should get rid of the concept of chartered or incorporated status [..]

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I have never, ever considered trashing incorporation as an option; I am totally surprised by this political headshot. Allow me to gather my scattered chunks of skull and mushy bits of brain before addressing it; this may take a while, as they say around Bill Gates.

I appreciate the way in which your whole post addresses the core issue. Individual human ambition (often summarily discarded as 'greed') is like a tiger. We can't tame it, we can only try to ride it. Even in political systems (such as Communism) that try to kill it, ambition rears its head nonetheless, only this time in the shape of corruption, bureaucratic infighting and persasive black-marketeering.

This points to another problem that is related to the theme of my post: we can't all be tigers. Someone has to ride the tiger. If we want to regulate markets properly in the sense described earlier, we need regulators and regulating bodies that have a totally different approach from the producers and consumers that make up markets. We need civil servants in the true sense, people who are as ambitious as the rest of humanity, but with different aims. They should be driven by civic values; values which have sadly been eroded by the process of marketization and privatization of public services which you describe.

Civil servants should have a radically different mentality from market parties. Let me give an example. We don't want a policeman to approach a crime scene or a fireman to approach a burning house with this thought foremost in his mind: 'What's in it for me?' Instead, we want them to serve the common good and be ambitious about it, which means that such thoughts should be as far as possible from their minds.

In short: proper regulation requires proper a regulator, a type of civil servant that has been relegated to the dustbin of market capitalism as a 'loser'. How do we rehabilitate him?

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Catholic Restauration is a new one, I must admit. Is that the movement where bistros serve bread that one is told earnestly is really something else? :wink:

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Teh Catholic Restauration for the Irish gentleman.

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Originally Posted by Adrian II

So how exactly do we regulate this market thingy to make it work in the interest of policy goals that society considers necessary or desirable, but without impeding either fairness (i.e. fair competition) or the profit motive of market parties?

My example is clear enough, right? The U.S. government wants affordable housing for people with a minimum income of 'X'. Since the U.S. government does not want to take upon itself the role of mortgage bank, it seeks to regulate financial markets in such a way that mortgage banks wil fulfill this target.

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That is my point though. If the government want to achieve certain goals, then it MUST do so itself, it cannot give the responsibility to private companies, for all the reason you have stated...

So the US government wants affordable housing for people with income x, which the "normal" market doesn't give? Then they have to set up their own mortgage bank for that purpose.

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Originally Posted by HoreTore

So the US government wants affordable housing for people with income x, which the "normal" market doesn't give? Then they have to set up their own mortgage bank for that purpose.

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You are aware of the history of Fannie and Freddie? :mellow:

I have and always will advocate the caveman market.

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Originally Posted by Adrian II

You are aware of the history of Fannie and Freddie? :mellow:

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I have to confess that I'm not... :inquisitive:

But I thought they were two privately owned banks, given a special mission by the government in return for tax breaks, etc?

A little background on Fannie & Freddie for those who are unfamiliar with the programs.

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Originally Posted by Hosakawa Tito

A little background on Fannie & Freddie for those who are unfamiliar with the programs.

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Okay, so they are creations of corporate welfare?

Government should not try to advance social causes through the private market; that is, they shouldn't mandate or regulate to enforce a certain aim, because that always leads to the government screwing up the situation. See Fannie and Freddie.

The government should only have programs to help those who can't get housing otherwise (using affordable housing as an example).

Or look at Seattle; from 1989 to 2006, the average price of a home increased by $200,000 due solely to regulations. The same idiot politicians who wring their hands about housing cause the vast majority of the problems by making it expensive to build homes through various regulations.

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Originally Posted by the article

Building in Seattle can be very time-consuming compared with nearby cities, because of Seattle's neighborhood-based design-review process, says Linda Stalzer, project development director for the Dwelling Company, an Eastside homebuilder.

Design-review committees, composed of citizens interested in architecture and development, are located throughout Seattle; their job is to review commercial and multifamily housing designs before they're approved.

"Depending on how complicated your project is, it might take you three or four times to get through it," Stalzer says.

Add together all the various review and comment periods, and it can take 12 to 18 months to get to the point of applying for a building permit, she says.

On a 25-unit Capitol Hill town-house project now under way, Stalzer estimated the various fees (including consulting and mitigation costs, but not building permits or land prices) have totaled about $650,000.

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Even now, the moron mayor is complaining about how some townhouses being built - that fall into the affordable housing category - don't look like he wants them to look, so he wants more regulations, which would of course increase the price:
http://seattletimes.nwsource.com/htm...homes09m0.html

My point is that government meddling to try to socially engineer what they want - not necessarily what the people need or want - will always have unintended consequences, usually worse than whatever good the city is trying to achieve. Regulations should be of safety and similar types - because any other regulations simply hurt the public.

The normal market could provide the goods, if the government got out of the way by trying to force their will onto the public.

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So the US government wants affordable housing for people with income x, which the "normal" market doesn't give? Then they have to set up their own mortgage bank for that purpose.

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:inquisitive: Um...

CR

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Originally Posted by Crazed Rabbit

The government should only have programs to help those who can't get housing otherwise (using affordable housing as an example).

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How?

Perhaps by renting cheap apartments and then renting them at a low price to those with low incomes. But the goal should not be profit, as with F&F.

CR

Maybe the goverment could purchase 10-20% of the property, giving the low income family a good deposit and thus lower rates and the goverment is investing that money as im assuming house prices usually rise...

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Originally Posted by Crazed Rabbit

Perhaps by renting cheap apartments and then renting them at a low price to those with low incomes. But the goal should not be profit, as with F&F.

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So the state should intervene in the housing market, thereby distorting it?

Your view that 'government [..] shouldn't mandate or regulate [..] the private market to enforce a certain aim, because that always leads to the government screwing up the situation' sounds like a mantra. It reminds me of Alfred Marshall's word: 'Every short statement about economics is misleading (with the possible exception of my present one).'

Regulation works fine in the Dutch telephony market, to name one example. We have a watchdog called 'Netherlands Competition Authority' which does a good job of preventing monopolization and other obstacles to competition, irresponsible use of collective facilities, as well as malpractice or unfair treatment of customers. Since its inception in the 1990's the NMa has been consistently run by gentlemen of the choleric persuasion who don't take crap from companies. It doesn't do well in certain sectors simply because markets in those sectors are not open and/or well-regulated to begin with. And it lacks clout to enforce rules and principles in certain instances. But it's a start. I see this as an important contribution to new ways and means to regulate markets in order to make them work in the public interest without impeding their natural dynamics.

The article is extremely interesting, thanks Adrian.

If I understand this correctly, they let these two banks borrow from the Federal Reserve on dirt cheap rates, because they're obliged (nominally, at least) to ensure affordable housing but nobody was really watching wether they were responsible with this advantage they held over everyone else :dizzy2:

If a Dutch CEO did such irresponsible things and the firm was left to go bankrupt, it wouldn't be difficult to cash-strap him to offset at least part of the remaining debt.

On regulation of companies in general...
Limited liability for companies is, or at least should be a double edged sword. I have no doubt that it encourages enterprising and thus helps to increase wealth overall. But if we accept that shareholders aren't liable for poor company results beyond what they've paid for their shares (wich we accept because it encourages financial activity) they in turn have to accept that this comes at the price of being regulated, in the interest of creditors and more generally the long-term health of the financial system.

I don't understand much about the situation. It sounds like a jumble. Any jumble is automatically interesting to me.

I like what Adrian has been saying so far - pretty much positing a question. I recognize the need for regulation and would love to strike the right balance as well. The government has a place in our lives - I'd like it to be as limited as possible, but it is still a tool of tremendous value. We can find the right balance and a more sustainable relationship between public and private.

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Originally Posted by Adrian II

So the state should intervene in the housing market, thereby distorting it?

Your view that 'government [..] shouldn't mandate or regulate [..] the private market to enforce a certain aim, because that always leads to the government screwing up the situation' sounds like a mantra. It reminds me of Alfred Marshall's word: 'Every short statement about economics is misleading (with the possible exception of my present one).'

Regulation works fine in the Dutch telephony market, to name one example. We have a watchdog called 'Netherlands Competition Authority' which does a good job of preventing monopolization and other obstacles to competition, irresponsible use of collective facilities, as well as malpractice or unfair treatment of customers. Since its inception in the 1990's the NMa has been consistently run by gentlemen of the choleric persuasion who don't take crap from companies. It doesn't do well in certain sectors simply because markets in those sectors are not open and/or well-regulated to begin with. And it lacks clout to enforce rules and principles in certain instances. But it's a start. I see this as an important contribution to new ways and means to regulate markets in order to make them work in the public interest without impeding their natural dynamics.

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You're right; it's a mantra and not always correct. One could look at other examples, like mpg mandates, as well. Though some short statements about economics aren't misleading; "Trade is, overall, good", for example.

I wouldn't say my solution has the state distorting the market as much. I mean, you could have the state try to build the public works projects - but that didn't turn out well, either.

I think there needs to be a realization that not everyone can move into a nice house immediately, and the government should remove regulations that make it hard to build affordable dwellings, even if it means the dwellings don't look that nice or whatever.

So to start, the government should undue its damage by pulling back its social engineering regulations and then see what the market does before trying more regulations. Another example from Washington is the state's 'growth management act' which makes it harder for cities to grow so there's less space for people, less supply of housing. That makes it very difficult to build low income housing in the first place - more regulations won't help. The market can and has made low income housing when they have the opportunity. But the political class will have to make a choice on whether they want people to afford homes or have all neighborhoods look as they please.

CR

If Freddie goes under will Fannie skyrocket?

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Originally Posted by Crazed Rabbit

Another example from Washington is the state's 'growth management act' which makes it harder for cities to grow so there's less space for people, less supply of housing.

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As far as I can see (from a ten thousand mile distance) the GMA isn't a bad initiative. The execution may be bad, but the idea sounds alright. From the Washington State website:

The Growth Management Act was adopted because the Washington State Legislature found that uncoordinated and unplanned growth posed a threat to the environment, sustainable economic development, and the quality of life in Washington.

The GMA requires state and local governments to manage Washington’s growth by identifying and protecting critical areas and natural resource lands, designating urban growth areas, preparing comprehensive plans and implementing them through capital investments and development regulations.

Public life in cities is a concern for the entire community of their inhabitants, not the preserve of investors, builders and property developers. Accessibility, the quality of public spaces (nature, landscape or cityscape, the availability of services and shops, public transport, educational establishments and all sorts of other communal issues) should weigh in.

Of course this makes certain options (like low income housing) more difficult, just as it makes other options (developing parks, shopping malls or entertainment centres) more attractive. So be it, after all it's the inhabitants' call if they want their city to maintain or develop a particular character. What I like most about it (on paper) is that it promotes local and regional variety instead of centrally planned development.

So please enlighten me, what is wrong with it?

I have, I confess, not studied it extensively and so will defer to this article:
http://www.effwa.org/main/article.php?article_id=152

Spoiler Alert, click show to read: 

Growth Management Act: good intentions gone bad
Washington's Growth Management Act celebrates its 10th anniversary this year. It could be a poster child for good intentions gone awry.

Ten years ago, many lawmakers and citizens rightly observed that the unique quality of life afforded to Washingtonians because of our beautiful and diverse natural environment was being compromised. Rapid population expansion engendered many challenges. The Legislature's remedy was the Growth Management Act (GMA), which directly affects at least 95 percent of the state's population.

A decade after the passage of GMA, we see that the unintended consequences have been devastating for many, while the noble goals envisioned by the Legislature are mostly unrealized.

Lawmakers designed GMA with 13 goals, most of which can be embraced by people of all political persuasions. Among the goals were affordable housing, efficient transportation, economic opportunity throughout the state, timely permit processing and citizen involvement in land-use planning.

Through various bureaucratic perversions of legislative intent, GMA has not only failed to meet its own established goals, it has negatively affected the ability of Washington citizens to afford homes, find jobs and expand their businesses — particularly in the rural parts of our state.

Landowners, especially farmers, are losing their property rights and, in many cases, their life savings. While GMA-authorized impact fees and land-use restrictions are driving up the cost of new development, the waiting process for some development permits stretches from months into years.

Is it even necessary to discuss GMA's goal of helping improve traffic congestion?

For most of us in urban Western Washington, the recession is relatively new. But in many rural counties, economic recession is a decade-old reality. These counties have not only lost tax revenue, they are now groaning under the weight of complying with GMA's planning, implementation and litigation costs. Jefferson County, for example, is at $3 million and counting. Meanwhile the county faces budget cuts in areas such as juvenile and family court.

We got into this mess because unelected government officials breached their legal boundaries under GMA and elected officials, the governor in particular, failed to rein them in.

While the Growth Management Act established goals for local planning, it was not designed to run roughshod over decisions made by locally elected officials. Yet, that is precisely what has happened.

Rather than providing a bottom-up planning process as the law intended, GMA policies are now handed down by governor-appointed Growth Management Hearings Boards — a process that is neither representative of local citizens nor effective in implementing the Act's goals. Whenever the Legislature has passed bipartisan measures aimed at reining in these unelected boards, governors have used their veto pen: first, Gov. Mike Lowry; now, Gov. Gary Locke.

Counties are running out of money and options. From 1993 to 1998, Mason County experienced a 10-percent drop in the number of private businesses located within the county. GMA land-use restrictions significantly limit the types of businesses that can locate in rural areas, and the Western Washington Growth Management Hearings Board ruled that animal hospitals, pet shops, small engine repair and plumbing shops are unacceptable uses.

This means many Mason County residents are forced to drive to neighboring Thurston County to find jobs, increasing commuter use of roads and highways.

In Lewis County, efforts to revitalize its struggling economy and lower its high unemployment rate were thwarted by hearings board restrictions on where businesses should be allowed to locate. Recent restrictions may impact 1,400 workers, nearly three times the level of countywide job growth since 1995.

According to the Act's original intent, it was to be the responsibility of local counties and cities, through their elected officials, to meet the state's land-use goals, while preserving rural character and encouraging economic development.

As it stands now, the governor-appointed review boards thwart rather than implement the GMA's goal of public participation. Citizens have almost no voice in who is appointed to the hearings boards, let alone in the land-use decisions the boards hand down.

Ultimately, hearings board decisions reflect the opinions of board members, and possibly the special-interest groups who challenged their local plans or regulations, rather than representing the views of local citizens and their elected officials.

Developing land-use policies to handle growth is a difficult task, particularly when geography and economics make growth unwelcome in some areas while welcomed eagerly in others. The Growth Management Act meant to do a good job in this arena, but has failed miserably.

The governor holds on to every jot and tittle of GMA, as if changing one element would make our beautiful state a wasteland of concrete and cars. When confronted with rural counties pleading for relief, Gov. Locke maintains that everything would be fine if these counties would just become compliant. In fact, a spokesperson from the governor's office recently maintained that the state has given counties 10 years of help and understanding, and now "it's time to get them in line."

Speaking of getting in line, the best way to mark GMA's 10th anniversary is to make sure enforcement is in line with the Act's original goals.

CR

From the link provided by Hosa and then changing it to a football game.

Freddie and Fannie are playing for the same team.

They get free kit (line of credit to the US Treasury, no state or local taxes)
They have 'left home' (private shareholders).
But their dad is the owner of the team (although private, it is a GSE)
Not only is their dad the owner, the ref has been told not to look too closely at any of their infractions (exemption from SEC oversight).

Who would like to have to play even on the same team as these guys as you would struggle for recognition and highly unlikely to get the Man of the Match as they can move around unimpedended.
Then think about the competitors, this is not a flat playing field.

=][=

My line of reasoning would be that government should were possible only be a regulator. And if it is to be a player it should set the standards. Be more heavily regulated, accountable and transparent... the dead opposite of The Federal National Mortgage Association & the Federal Home Mortgage Corporation.

BTW the nicknames of Freddie and Fannie don't inspire much faith in their maturity, level headness or ability.

Not everyone should be a home owner. Guaranteeing affordable housing is a good thing but it still should not be used to get people who cannot afford a house the burden and responsibility of a house. Regulate the credit score needed to get a home and still receive an acceptable foreclosure rate to stay in business. Anyone with a low credit score can still get an apartment, work on their credit and then get a house in a few years. We (society) are always in a hurry; homeownership is a massive undertaking for someone on the cusp of financial security. Lending institutions, private or government, should tighten their access and stop dangling the carrot.

If they want to be a successful lender that will be around for years, then maybe they should be a little more careful who they lend to. It is not mean or denying a right, it is common sense that will keep them around, as a resource, for all to use.

Having a certain percentage of the population renting is good and should keep the real-estate market from becoming what it is now, especially in Michigan, a giant mess of foreclosures and uncertainty.

Oh boy....:inquisitive:

Quote:

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The government is expected to take over Fannie Mae and Freddie Mac as soon as this weekend in a monumental move designed to protect the mortgage market from the failure of the two companies, which together hold or guarantee half of the nation's mortgage debt, a person briefed on the matter said Friday night.

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People need to be executed for this. Man I wish we still did that. 25 billion?

Fannie and Freddie, and IndyMac, Bear Stearns, Lehmanns, and all the rest are natural and predictable consequences of the economic model used over the past few years. Trillions upon trillions of "dollars" have been loaned into existence on the basis of a monumental credit bubble, without any real economic activity to back it up. Regulations on lending practices and bank reserves have been progressively weakened, so we see Sub-prime, Alt-A, Option ARMs, self-certs etc flowing like water, fuelled by the bubble in the notional value of housing. Second mortgages, refinance deals and all the rest means that millions of home owners have been conned (or conned themselves) into believing their real estate values are, well, real. Homes have become ATMs, as more and more "equity" has been liquidised -- at interest -- and now the inevitable correction comes along and wallop - negative equity, rising debt, foreclosures, loss of confidence, construction tanks, job lay-offs, welcome to Slumburbia etc etc.

Mortgage lenders have avoided risk by "securitising" their loans, whilst those who bought these bundles are now facing the realisation that they are largely worthless. Lehmann's have "marked to market" BILLIONS of dollars worth of assets at 22c to the dollar. Some banks have written them down to zero. These toxic securities have spread worldwide, a major factor in our own Northern Rock fiasco, like a huge black hole that is sucking liquidity out of the economy.

The Fed's discount loan window is open 24/7, and all sorts of financial institutions are queueing up for emergency re-capitalisation. Yet they're back next week for more. Right now the US taxpayer is taking the hit for all this - although the financial profits have been privatised, as soon as the risks come home to roost, they get socialized. As ever, the market is more free for some than it is for others.

Regulating, at this stage in the game, is shutting the stable doors after the horse has not only bolted, but been slaughtered, boiled down to glue, and shipped off to China.

Now if China and other sovereign wealth funds decided to dump their holding of Fannie and Freddy securities, then the organic fertiliser will definitely be in collision with the mechanical air-circulation installation. One or both would go down, and the wider economy wouldn't know what hit it, as the domino effect ripples through the entire banking sector. Prudence says, right now, clear your debts, realise your assets, and find a very big fluffy mattress to hide them under, it's gonna be a bumpy ride.

Quote:

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Right now the US taxpayer is taking the hit for all this - although the financial profits have been privatised, as soon as the risks come home to roost, they get socialized. As ever, the market is more free for some than it is for others.

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Quite. This is my main gripe about this saga.

As an accounting major I say regulate the hell out of this stuff.

A) Makes me more useful
B) In theory, it should help prevent stuff like Fannie, Freddie, Enron, Etc.

However, too much regulation is a terrible thing. So I pretty much agree with the majority of posters. :laugh4:

We should have let the institutions fall and their investors become penniless. Ideally, it would have let investors know we won't bail out idiocy and so be more careful about investing in the future.

CR

Quote:

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Originally Posted by Crazed Rabbit

We should have let the institutions fall and their investors become penniless. Ideally, it would have let investors know we won't bail out idiocy and so be more careful about investing in the future.

CR

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Ideally, this is what I'd prefer too. The trouble is that government meddling has allowed the problem to grow so much bigger than it would have if it had just kept its hands off. Right now, if Fannie and Freddie folded, it would be catastrophic to not just the US economy, but the global economy. It's gone well beyond the idiots who made the loans taking the fall- sadly, the idiots in government never take it on the chin, we do.:sweatdrop:

Apparently Lehman Bros. is having trouble raising capital, and lost half their market value today. If they crash and burn, are they considered "too big to fail" and get the bailout, ala Bear Stearns, or will we finally close the taxpayers' charity fund?

Nationalisation is going to cost private investors a fortune: since the state has control, probably no more dividends, and since the share price went down by about 98%, they've all but lost all their money.

~:smoking:

Quote:

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Originally Posted by drone

Apparently Lehman Bros. is having trouble raising capital, and lost half their market value today. If they crash and burn, are they considered "too big to fail" and get the bailout, ala Bear Stearns, or will we finally close the taxpayers' charity fund?

---

And we will soon have our answer:
http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

Spoiler Alert, click show to read: 

The Treasury Department and the Federal Reserve are helping Lehman Brothers put itself up for sale. The details are not finalized, but sources familiar with the matter say the purchase is expected to be completed and announced this weekend before Asian markets open Monday morning.

The Fed and Treasury are talking to a wide range of firms and examining multiple scenarios for the sale of the venerable investment brokerage.

Lehman Brothers, which had been anxious to show it could weather the credit crisis that contributed to the firm's $3.9 billion third-quarter loss, said Wednesday that it would sell a majority stake in its investment-management division, slash its dividend and spin off about $30 billion of real estate assets.

The announcement did little to calm investors' concerns that Lehman, the smallest of the four major Wall Street investment banks, might suffer the same fate as former rival Bear Stearns, which was acquired by J.P. Morgan Chase in a deal regulators brokered in March after a bank run that shook the securities industry.

Lehman's share price fell nearly 40 percent to $4.22 at the end of trading today, continuing a precipitous fall from more than $60 a share as of February.

Is WaMu next to fall? That would be crazy.

http://www.iht.com/articles/2008/09/...s/15lehman.php

The one I am the most conerned about at the moment is AIG, both for financial and personal reasons. I have read indications that it is nearing collapse as well unless it gets some capitalization to cover its losses. AIG is the world's largest insurance company, and if it tanks it will have massive repercussions at all levels. I also worked there for two summers during law school and have a lot of friends who have careers there. It's bad news all around if AIG doesn't get shored up quickly.

I recommend that you all withdraw your savings from whatever bank you have them in, I know I already have.

Spoiler Alert, click show to read: 

:tongue3:

Quote:

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Originally Posted by Sasaki Kojiro

I recommend that you all withdraw your savings from whatever bank you have them in, I know I already have.

Spoiler Alert, click show to read: 

:tongue3:

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Under the mattress is the safest place! ~D

Bank of America got Merrill Lynch for a good price. I suppose at some point they will stick a capital 'T' "The" in front of their name after this. BoA looked at Lehman, but decided they were a lost cause without government backing and jumped on Merrill who was healthier. At the end of this mess BoA is going to be a juggernaut. I think I need to start complaining about the interest rate I'm getting on my checking account...

AIG does not look to be in a good position. Don't know who is willing to take on that risk.


I've been wondering when Ford/GM will ask for a bailout. They are both bleeding cash, and will eventually go through their reserves. Then I saw this on over the weekend:
http://www.washingtonpost.com/wp-dyn...091203341.html
Sounds to me like a "we bet everything on gas-guzzlers, can you please loan us money cheap while we retool our factories for small fuel-efficient vehicles that the Japanese have a 20 year head start on" whine.

I'm curious, exactly who did really benfit on this bubble?

Obviously getting caught with the poor loans , making you bankrupt or getting the state to bail you out isn't profitable.

Ah the sweet sweet smell of corporate welfare wafting through the economy from baked books and over leveraged assets. When will the fun stop?

Oh look the private sector does it so much better then government, why burden the private sector with rules and regulations. But if anything goes wrong to the private investments, lets bail it out with public sector money.

=][=

I think the underlying structural issues need to be addressed. The US economy is looking suspicously too much like the 90's Japanese economy were the big banks and insurers weren't structured for the modern economy.

Has there been no learning from the likes of Arthur Anderson, the Energy Trading and WorldCom?

=][=

At the end of the day transparency and accountability have to rise up. And if the private sector expects handouts, it should expect substantial strings attached. Not just to those who get it, but the entire sector so that the mistakes are not repeated.

=][=

PS How is Warren Buffet and Co. doing? If it is a bear market, he must be in getting some bargins.

Quote:

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Originally Posted by drone

Under the mattress is the safest place! ~D

Bank of America got Merrill Lynch for a good price. I suppose at some point they will stick a capital 'T' "The" in front of their name after this. BoA looked at Lehman, but decided they were a lost cause without government backing and jumped on Merrill who was healthier. At the end of this mess BoA is going to be a juggernaut. I think I need to start complaining about the interest rate I'm getting on my checking account...

AIG does not look to be in a good position. Don't know who is willing to take on that risk.


I've been wondering when Ford/GM will ask for a bailout. They are both bleeding cash, and will eventually go through their reserves. Then I saw this on over the weekend:
http://www.washingtonpost.com/wp-dyn...091203341.html
Sounds to me like a "we bet everything on gas-guzzlers, can you please loan us money cheap while we retool our factories for small fuel-efficient vehicles that the Japanese have a 20 year head start on" whine.

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So what happens when Bank of America pulls the same :daisy: that all these other numnutzes have done? :dizzy2:

Quote:

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Originally Posted by makaikhaan

So what happens when Bank of America pulls the same :daisy: that all these other numnutzes have done? :dizzy2:

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I haven't seen the balance sheets, but I believe Bank of America is fairly isolated from the mortgage crisis. They avoided sub-prime lending and investing, and they have a huge amount of capital. They had tried earlier to start an investment banking arm, but it never really took off, so taking over Merrill Lynch gets their foot in the door and shores up Merrill's investments. What sank Lehman is not debt, but the inability (or the appearance of) to raise capital to cover that debt. Banks like Wachovia, Washington Mutual, etc, are in trouble, best to avoid those, once the blood is in the water it's only a matter of time. There are a few big banks that kept away from the mortgage wheeling and dealing, those will be the best bets for survival. As far as where your money goes, look up the rules of FDIC insurance. If you have more than $100K with any one bank under one name, start up an account elsewhere and transfer.

Quote:

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Originally Posted by drone

I haven't seen the balance sheets, but I believe Bank of America is fairly isolated from the mortgage crisis. They avoided sub-prime lending and investing, and they have a huge amount of capital. They had tried earlier to start an investment banking arm, but it never really took off, so taking over Merrill Lynch gets their foot in the door and shores up Merrill's investments. What sank Lehman is not debt, but the inability (or the appearance of) to raise capital to cover that debt. Banks like Wachovia, Washington Mutual, etc, are in trouble, best to avoid those, once the blood is in the water it's only a matter of time. There are a few big banks that kept away from the mortgage wheeling and dealing, those will be the best bets for survival. As far as where your money goes, look up the rules of FDIC insurance. If you have more than $100K with any one bank under one name, start up an account elsewhere and transfer.

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Drone, I'm not talking about in the next year or two. I'm talking about 15 or 20 years down the line, when they inevitably succumb to the same sort of stuff that Fannie, Freddy, and Lehman have. What then, when we've got an even bigger crisis our hands? BoA will be so gigantic that the government will inevitably have to bail them out too. Honestly, I can't believe I'm saying this, but with so much of the world economy at stake, the heads of these super banks should be getting the death penalty for this. SOMETHING to get it through their heads that they can't just do whatever they want and get an 8 million dollar buyout offer so they can go retire in comfort to Miami or Panama City.

Quote:

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Originally Posted by makaikhaan

I'm talking about 15 or 20 years down the line

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wut lol? get your head out of the clouds, brotha. anything further ahead than 5 years from now ain't worth worrying about. bush 08!

Quote:

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Originally Posted by Papewaio

At the end of the day transparency and accountability have to rise up. And if the private sector expects handouts, it should expect substantial strings attached. Not just to those who get it, but the entire sector so that the mistakes are not repeated.

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Alright, alright. But what sort of accountability? That's the issue I've been trying to raise.

Fannie and Freddie were accountable. So were Enron or WOL. It didn't work because

1. they got preferential treatment, and
2. the oversight was lax/incompetent/corrupt

It is obvious that markets do not sufficiently regulate themselves voluntarily and that the State is usually a bad supervisor. So, how do we make the State a better supervisor without killing the benefits of private business?

Something from Stratfor. Sorry, don't have a link:

Spoiler Alert, click show to read: 

China: Making Due With U.S. Assets
September 12, 2008 | 2036 GMT

PAUL J. RICHARDS/AFP/Getty Images
Freddie Mac headquarters in McLean, Va.Summary China International Capital Corp., an investment bank, estimated Sept. 12 that China’s holdings in U.S. mortgage giants Fannie Mae and Freddie Mac account for a fifth of China’s foreign currency reserves, at approximately $400 billion, according to China Daily on Sept. 12 which cited China International Capital Corp. The immense size of this investment, combined with China’s holdings of other U.S. assets, reveals the persistent lack of diversity in China’s foreign reserve policy. While the Chinese would like to put some of their money in other places, their economic dependence on American consumption means they are essentially stuck making middling returns on U.S. debt.

Analysis
RELATED SPECIAL TOPIC PAGE
U.S.-China Economic Relations
China’s holdings in U.S. debt through mortgage giants Fannie Mae and Freddie Mac amounts to about $400 billion, or one-fifth of China’s total foreign currency reserves, according to a Sept. 12 China Daily report quoting the major investment bank, China International Capital Corp. (CICC). Though estimates differ and the precise value of the Chinese holdings is in constant flux, the roughly 20 percent chunk is proof enough that China stands to suffer big losses from the Fannie and Freddie debacle despite the U.S. Treasury bailout.

After decades of rapid economic growth driven in great part by exports of manufactured goods to American consumers, China has built up the world’s largest foreign currency reserves at approximately $1.8 trillion. The CICC believes that 60 percent of this massive sum, or $1.08 trillion, consists of US dollar assets, though some economists say it is closer to 70 percent — the rest lies mostly in euros and Japanese yen. The $1.08 trillion in dollar assets can be further divided into 50 percent (or about $540 billion) in US treasury bills and 40 percent (about $432 billion) in US agency bonds. The remaining ten percent of China’s state holdings of US securities comprise U.S. corporate debt and equities. The roughly $400 billion that China holds in Fannie and Freddie represents a fall from CICC’s previous estimate of $447 billion in June. But the precise measurement is in continual flux as the relative value of U.S. securities fluctuate, and in the current global economic situation fluctuation can be rather dramatic.

The disproportional presence of American assets in China’s reserves reveals the country’s inability or unwillingness to diversify the range of financial investments it uses to sock away its extra cash — despite the warning signs ahead of the subprime mortgage crisis and credit crunch, commodity inflation and the various other economic woes China now faces.

Beijing has not diversified its reserve holdings away from the dollar because doing so would be incredibly risky. Beijing sees its dollar assets as so numerous that any attempt to offload them in bulk would be dangerous to the country’s financial — and ultimately social and political — stability. Not only would it have trouble selling, say, $100 billion of securities on the spot, but flooding the market would drive the value of its remaining assets down. Moreover, American securities remain Beijing’s best option, despite the currency risk and low returns, because China’s domestic consumption is not developed enough to merit investing at home.

So rather than devalue its own dollar-denominated assets, China will for the most part hang onto them, knowing that only the United States provides a pool of debt big enough to handle the massive reserves that the Chinese continue to accrue through their trade surplus. (Most other serious contenders — Russia, Brazil, Australia, Germany — are running surpluses and do not need to borrow from China.) Furthermore, America is a secure place for China’s money, unlike some of the secondary options.

China can begin to break its dependence on U.S. habits of consumption and debt accumulation and reduce the proportion of U.S. assets in its foreign reserves by buying up non-dollar assets instead. But it will have to do so slowly in order to reduce the negative impact on China’s remaining dollar-denominated assets. Ultimately, until China can generate enough domestic demand to soak up its surplus funds at home, it will have to accept the middling returns of American securities.

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Looks like China is in the same mess we are. Kinda supports my theory that we're cutting off our nose (devaluing the dollar) to spite our face (China).

Quote:

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Originally Posted by Adrian II

It is obvious that markets do not sufficiently regulate themselves voluntarily and that the State is usually a bad supervisor. So, how do we make the State a better supervisor without killing the benefits of private business?

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Anti-trust laws should be enforced. There is no way companies like Fannie and Freddie should be permitted to hold 70% of US mortgages. Forcing overblown companies to split into many pieces is a viable solution.

I'm going to try to express a very big idea. I hope I can do it justice.

Nassim Taleb coined the term "ludic fallacy". Ludic is the latin word for games. Probability theory and game theory are sufficiently advanced to predict economic returns for gambling casinos. However, the economy as a whole is a different animal.

Probability theory and game theory are fashionable on Wal-Street. Quants (analysts) force their data to fit the Gaussian models, and express their uncertainty in standard deviations. Based on these models many people thought they understood how much risk they were taking. We all know outcome when they are wrong. The real world, and subsets like the financial markets, are not like games. The rules are not well defined, and rare events can turn the whole systems upside down.

We don't have any logically sound way of making decisions under uncertainty. Gaussian models are helpful most of the time, but sometimes they are woefully wrong. There are other mathematical models, but they are not logically sound either. We need to acknowledge deep uncertainty. In the words of Donald Rumsfeld, "there are unknown unknowns".




This idea also informs my view of regulation going forward. Many people are calling for the government to regulate the procedures used by credit rating agencies. This is a horrible idea because the regulators have no logically sound procedure. If the government did oversee credit rating procedures, this would lead to an even more dangerous level of misplaced trust in flawed models.

Quote:

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Originally Posted by Mangudai

This idea also informs my view of regulation going forward. Many people are calling for the government to regulate the procedures used by credit rating agencies. This is a horrible idea because the regulators have no logically sound procedure. If the government did oversee credit rating procedures, this would lead to an even more dangerous level of misplaced trust in flawed models.

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Besides Banquo's Ghost proposition that we abolish incorporation, this is another highly original contribution to the thread. It is an approach (or rather, an issue) which never even occurred to me.

Question for you. Gaussian prediction is mostly used when we don't know the mechanism underlying a distribution, right? If we would know the mechanism, we might take better samples and reach more sound conclusions with regard to markets. This points to inadequacies in economic theory rather than statistical analysis.

Or am I being blond here? :hair2:

Mangudai brought up what brought down "Long Term Investment" roughly 15 years ago, and now so many big names. When you roll the dice each new roll has the same probability. Rolling 66 times a 6 is very very improbable.

But in our real social world a session of 4 sixes in a row can highly increase the chance of a six in the next roll, because people may expect this exit. In our highly interconnected world, especially in the financial one everything influences everything with a varying degree. Some seemingly unconnected events can shape the peception and create in the mind of the majority a very strong correlation between events.

This in turn can morph into a self-fullfilling prophecy like the famous bear or bank run. Many think Lehmann will fail, many sell, more see this as a sign of Lehmann failing more sell. While usually there are enough different opinions to moderate a stocks movement in highly volatile and nervous markets a rumour can bring down a titan. Something which is quite unthinkable in pure statistical analysis. But something which happens now.

P.S: LT Investment thought they could only loose 5 millions a day at most, and they had two Nobels in their ranks and other highly esteemed mathematicians making this calculations. Then they lost it at a rate of over 50 millions a day.

Quote:

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Originally Posted by Adrian II

Besides Banquo's Ghost proposition that we abolish incorporation, this is another highly original contribution to the thread. It is an approach (or rather, an issue) which never even occurred to me.

Question for you. Gaussian prediction is mostly used when we don't know the mechanism underlying a distribution, right? If we would know the mechanism, we might take better samples and reach more sound conclusions with regard to markets. This points to inadequacies in economic theory rather than statistical analysis.

Or am I being blond here? :hair2:

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Here are two quick examples one is Gaussian the other isn't.

Line up 100 people and measure their height. The distribution is Gaussian.
Line up 100 authors and measure how many books they sold, one of the people is JK Rowling author of Harry Potter. Her score is thousands of times greater than everybody else in the line put together. Not Gaussian.

Automobile insurance is well modeled by Gaussian methods.
Home owners insurance breaks the Gaussian model when there is a hurricane or tsunami. (Companies like All State barely remained solvent after Katrina.)
AIG wrote insurance on financial derivates. At the start of the crisis the CEO said "Our balance sheet is bullet-proof". He was relying on Gaussian models.


Economic theory is inadequate and may always be so. Oleander pointed toward one reason why. Perception and what we think other people are going to do is central in markets. Right now the best bull market are stable earners like packaged food, toothpaste, toilet paper, etc. I'm up 8% on that part of my portfolio in the past few weeks. The sector will probably go up another 8% as everybody rushes in hoping not to be last. Then when it appears that everybody is in who wants in, the stock prices will suddenly drop back to their normal levels.

Sales of toothpaste are Gaussian. Sales of the toy most requested this Christmas are not.

A opinion article on how Fannie and Freddie became so top heavy they toppled:
http://www.bloomberg.com/apps/news?p...d=aSKSoiNbnQY0

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Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. At one telling moment in late 2004, captured in an article by my American Enterprise Institute colleague Peter Wallison, the Securities and Exchange Comiission's chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even ``on the page'' of allowable interpretations.

Then legislative momentum emerged for an attempt to create a ``world-class regulator'' that would oversee the pair more like banks, imposing strict requirements on their ability to take excessive risks. Politicians who previously had associated themselves proudly with the two accounting miscreants were less eager to be associated with them. The time was ripe.
...
What happened next was extraordinary. For the first time in history, a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets.

Different World

If that bill had become law, then the world today would be different. In 2005, 2006 and 2007, a blizzard of terrible mortgage paper fluttered out of the Fannie and Freddie clouds, burying many of our oldest and most venerable institutions. Without their checkbooks keeping the market liquid and buying up excess supply, the market would likely have not existed.

But the bill didn't become law, for a simple reason: Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter.

That such a reckless political stand could have been taken by the Democrats was obscene even then. Wallison wrote at the time: ``It is a classic case of socializing the risk while privatizing the profit. The Democrats and the few Republicans who oppose portfolio limitations could not possibly do so if their constituents understood what they were doing.''

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Democrats love regulations, except when it's on the government. Pape made a good analogy about the football team.

CR