Regulating Fannie and Freddie

[HoreTore]

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.

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...

[Adrian II]

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

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.

[Banquo's Ghost]

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?

A challenging thread, indeed.

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.

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.

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?

[Adrian II]

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

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?

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?

Teh Catholic Restauration for the Irish gentleman.

[HoreTore]

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.

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.

[Adrian II]

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.

You are aware of the history of Fannie and Freddie?

[CrossLOPER]

I have and always will advocate the caveman market.

[HoreTore]

You are aware of the history of Fannie and Freddie?

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

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

[Hosakawa Tito]

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

[CountArach]

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

Okay, so they are creations of corporate welfare?

[Crazed Rabbit]

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.

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.

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.

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.

Um...

CR