A step in the right direction?

I’m open for opposing opinions, but at first blush the plan Obama outlined to change Fannie Mae and Freddie Mac seems like a step in the right direction.

Private investors take more of risk. Agree.

Fannie and Freddie lose the implicit guarantee of government. Agree.

While home ownership is good, affordable rental housing is also acceptable. Agree. Renting makes sense for a lot of folks.

Owning does too. You should have to prove you are responsible before owning, though. When people have a tough time getting a loan from a private investor to buy a home, those people should be encouraged to demonstrate responsible behavior.

The only part I had trouble with, so far, was that government would be secondary guarantor. That sounds like an explicit guarantee. Maybe I don’t understand that part.

But, again, a step in the right direction, no?

Could Obamacare be next?

In his speech outlining the plan, Obama quips that this plan will sound confusing for those that call Obama a socialist. For the record, I never thought he was a socialist. I just thought his view on the role of government was on par with public school sophomores. It’s not so much socialism, but the belief that solving problems can be easily accomplished by having government do something about it.

6 thoughts on “A step in the right direction?

  1. Seth – – – – – – – I’m disappointed!

    Obama is no idiot. He knows exactly what he’s doing and, yes, he is a socialist (for the record!). I won’t repeat my explanation of why socialism does not necessarily entail government ownership of the means of production, but merely control of the means of production as I believe you understand my argument. However, to believe that Obama has been, by our definition, a failure as POTUS because he is stupid or inexperienced suggests that one either does not recognize that success for him (socialization of the US) is different than success as defined by us or does not recognize the tools used by the political left.

    Obama has a well documented history of saying one thing and implementing another. He often insists that he is for a smaller and less intrusive government, yet all of his actions say “bigger” and “more intrusive.” He is a very talented orator with an effective use of rhetoric. He can tell you, in the same sentence, that he wants less government intervention and yet more government intervention and leave the masses believing that he’s proposing less government. When Obama speaks, you need to look at his message like you would look at Dirty Harry’s .44 magnum – “…being this is a .44 Magnum, the most powerful handgun in the world and will blow you head clean off, you’ve gotta ask yourself a question: ‘Do I feel lucky?’ Well, do ya, punk?”

    For the record, when you propose that Obama merely wants to solve problems by having government “doing something” about them, just what do you thing “doing something” about them entails? It certainly doesn’t mean making suggestions or holding a beer summit. As Mao said, “Political power grows out of the barrel of a gun.” Having the government “do something” about the problems that politicians – not the market – decide are problems, necessarily means government control (to the degree that is needed to accomplish its objectives) of whatever “private” person or persons is/are creating that problem. Capitalism exists when people have (a) property rights, and (b) free and unfettered exchange. When government infringes on these rights, rather than protects them, we have socialism to one degree or another. The question is, do you want to lean more towards capitalism or more towards socialism.

    Now, as far as Obama’s Phoenix speech:

    While I agree with Obama’s recognition that Freddie and Fannie must go, he also demanded new government guarantees for the housing finance market, which will continue the problematic taxpayer guarantees that contributed to the housing crisis to begin with. Here’s the quote form the NYT piece you linked:

    “Under Mr. Obama’s principles, which he said were reflected in the Senate bill taking shape, Fannie Mae and Freddie Mac would further shrink their portfolios and lose the implicit guarantee of a federal government bailout. Instead, private investors would be most at risk, with the government a secondary guarantor.”

    Sorry for being sarcastic, but what part of “with the government a secondary guarantor” didn’t you understand? Is there anything that leads you to believe that moral hazard won’t come into play again if the taxpayers are still on the hook to bail out the “private” lenders?

    Obama calls for government reinsurance of mortgage securities after private capital is used up and he indicates that such reinsurance would be priced so as to be self-funding. But why is government needed if a reinsurance guarantee is self-funding? Like the present system, this puts taxpayers at risk and lessens the incentives to make safe loans. This is just more of the same with a new name!

    Now, I’m sure you noticed that I put “private” in quotation marks in the paragraph before the preceding one. That was to indicate my belief (supported by decades of government examples) that Obama is certain to impose new rules, mandates, restrictions, czars, etc. on these “private” lenders rendering them under even more government control. He sees this as an opportunity for the government to intrude even more into private industry and where better than the folks with all the money!

    Instead of establishing a free market for private housing and housing finance, Obama is using this as an opportunity – as he always has – to expand the government with new federal programs, subsidies, and guarantees. His new spending means taking more money from the producer class and diverts the attention from actually fixing the housing markets.

    • Good points. Especially about saying one thing and doing another. And, I agree on the secondary guarantee. That sees even stronger than an implicit guarantee. And there should be none.

      • Seth – When Barry says something (especially as it pertains to economics) that sounds like a high school sophomore, it’s not necessarily because he doesn’t know any better. It’s because he understands that the majority of his constituents don’t know any better. His economic advisors – at least most of them – aren’t there to advise his of the best way to get the economy back on track. They are there to come up with plausible explanations to support his preconceived agenda and to give him cover for whatever he does. That’s why so many advisors quit after one term – there is a big disconnect between what they know is right and what they are forced to say that they really don’t believe.

        Of course, some of them get caught up in the spotlight of being a “rock star” and the shame of lying and convince themselves that the crap they are saying is right.

  2. As we discussed in another conversation, the real danger of socialism is that of a bureaucratization of economic life. While Mises and Hayek argued that central planning would fail because it lacked information, its real failure results from the lack of motivation to act on information. A capitalist business responds market signals (prices) because it will lose money if it ignores these signals. Government bureaucrats have little incentive to act on signals because it’s not their money that is lost and also because they recognize that if something goes wrong, having done something is more likely to get them in trouble than if they had done nothing (and claimed – like Obama – that the “something going wrong” was the first they had heard about the problem).

    So, if bureaucratization is the big danger of socialism, what do we mean by “bureaucratization”?What we mean is an administrative system that has been made complex, inefficient and inflexible. In general, this implies a system operated by fixed rules that necessarily ignores individuals and individual freedoms.

    Is there anyone out there who doesn’t comprehend that when the government (because they are providing the secondary insurance and therefore feel they have the right to) imposes rigid rules on private financial institutions regarding who they must lend to and at what rates instead of letting these institutions use market signals to make such decisions, this is a bureaucratization of economic life? That this level of government control of “private” institutions moves us closer on the economic spectrum towards socialism and away from capitalism?

  3. So if a bill makes it through congress that “downsizes” Freddie and Fannie but doesn’t make them go away, won’t that slide us closer to capitalism and away from socialism?

    My guess is we have to wait until an actual piece of legislation passes… and then wait to see how it is implemented before we’ll actually know the answer.

  4. “My guess is we have to wait until an actual piece of legislation passes… and then wait to see how it is implemented before we’ll actually know the answer.”

    Didn’t Nancy Pelosi say that?

    If congress eliminates Freddie and Fannie, but in the process gains de facto control of what were once private banks, that’s sliding towards socialism. The federal government shouldn’t determine who is the head of a private lending institution or who works there, they shouldn’t determine or influence who does or doesn’t get a loan (as in the CRA), they shouldn’t set the interest rate (as in the Federal Reserve) and they shouldn’t create a moral hazard by having taxpayers bailout lenders who make bad loans. Banks want to make money. It’s in their interest to make loans, but to make them in such a manner that they don’t lose money. Thus entails lending to people at competitive rates which may be different for people who are at a higher risk of default or not lending to people who pose a significant risk of not being able to pay back the loan. Even the left agrees that it’s bad for banks to “trick” these high risk folks into borrowing money they can’t pay back – that is, except when the left is upset that banks are “discriminating” against these high risk folks. The truth is that EVERYONE discriminates in their business transactions.

    Discrimination is NOT wrong when it is based on real facts, i.e. I am not willing to lend $500,000 to Mr. Jones for a new Jaguar because he only earns $15,000 per year, he already has $200,000 in credit card debt, he has no equity in his home that he rents for $1000/month, and he has alimony payments of $300/month. Discrimination IS wrong when it is based on things such as race, religion, etc. if those things have no bearing on the issue being decided. That’s not to say that it should necessarily be illegal, just that it’s wrong. In general, when discrimination is wrong, the market will eliminate those who discriminate on a basis that has no merit, i.e if I own an NBA franchise and I refuse to hire athletes who are black, sooner or later, I’ll go out of business (and the guys who did hire athletes based on their abilities rather than their color will succeed).


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