The subprime crisis has dominated financial thinking lately including taking a few CEO scalps amongst banking companies. Why are we surprised? It was a high risk venture predicated on house prices rising forever. Those that take those risks should be able to accept them.
Government is not there to bail out those risk takers. Between the Greenspan/Bernanke put
and now the Bush Administration negotiating that subprime mortgages not go to the higher interest rates for another three years
- we have massive interventions into the allocation of risk and reward.
They are making the market fail.
From the article:
If adopted, this policy would create winners and losers. The winners would be people who bought homes they couldn't really afford by getting subprime loans whose rates were due to skyrocket after two or three years. Other winners would include the neighbors of these people, who wouldn't have to live next to empty, foreclosed houses. Local and state governments would benefit if the policy keeps property taxes rolling in. And there are those investors that the Journal mentions, the ones who are anxious about the mortgage meltdown. They must always be watched out for.
The losers include people who want to buy houses, and who would benefit from increased inventories of distressed homes on the market. It's bad news for Realtors, lenders and mortgage brokers, who depend on home sales and refinances to stay in business.
There are some issues here too; one is the investors who backed these high-risk are now expecting a high return for those that could afford the starting low price period and are now in the high interest rate part of the loan. Secondly the banks don't own these loans, they sold the subprime mortgages off into the equity market. They really don't have any authority to mess with these loans - nor does the government.
The article continues:
And what about people who saved up for down payments and got responsible mortgages? This policy seems like a slap in the face to them. They're suckers. They should have been irresponsible with their debts and bought unaffordable houses with 2/28 subprime ARMs instead of being responsible, right? Is it good policy to reward subprime borrowers and make prime borrowers feel like schmucks?
I was one of those people. I saved up a 20% down payment before buying a house. I don't particularly care about that; however, markets are markets and government bailing out of anyone who has been caught in a bad deal - whether Lockheed Martin or a subprime borrower - destroys the whole purpose of having a market system.
The Bush Administration is wrong to do this.
Today the US Government took over the two credit extension companies Fannie Mae and Freddie Mac placing them into conservatorship. Which is a gentle form of bankruptcy and Chapter 11. It means that tax payers now explicitly back the credit those companies extend, including their existing liabilities, rather than implicitly and on the nod before. According to Big Picture this means that
The conservator's goals are to (1) put the company in a sound and solvent condition, and (2) carry on the company's business and preserve and conserve the assets and property of the company.
Tax payer money is being used to buy the mortgage backed securities the two companies own. According to Jim Rogers
, those that read the prospectus of the two companies knew they were over extended and were going to fail.
The subprime mortgage market was a bad idea. The US also has the process of those that give the mortgage then selling them off to another company. This divorces the lender from collection and is one reason why this has turned into such a schmozzle. It is not a big deal if you collect the mortgage fees on the package and then rid yourself of the worry of debt collection.
I am not sure if the cost to the US taxpayer is five trillion or half a trillion; there does not seem to be concrete data on this. If it is five trillion that is the current US national debt. For perspective, even half a trillion is more than the farming subsidy bill amount and more than what the US pays for its military year to year.
The US Government is a debtor nation already so to pay for this i is likely that more money will be printed which means greater inflation pressure. This has been the policy of the central bank in the US for a while now. I doubt that will change. For the taxpaying American that will be the most obvious outcome of the current policies; increased or continuing high inflation
- Around the Australian commentators, Gary Sauer-Thompson argues
it punctures the free market illusions and aspirations of the US Republican Party:
This must sound like socialism to Wall Street and the free market Republicans whose rhetoric is that "small government" is a virtue. Didn't the Republican convention include countless attacks on big government? Yet here we have the Republican Bush administration nationalizes a major industry! The illusions need puncturing. John Quiggin writes
that this is the end of neo-liberalism. The US financial sector was allowed to innovate into the mortgage market with minimal regulation and ended up putting pressure on the stability of the financial system instead:
On the other hand, the fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state. Joshua Gans is left defending
his AussieMac proposal in the light of the failure of the US institutions. He argues the difference is that the backing from the government is explicit not implicit like it was from Freddie Mac and Fannie Mae (until today). Somehow it is assumed this will stop AussieMac purchasing high risk debt?
In our mind, it is the implicit guarantee that is the issue and when you recognise the causes of imperfection in markets -- namely, information asymmetry -- you realise that being explicit is the way to go and the way to improve efficiency. So to spend time attacking Freddie and Fannie is not particularly useful for the Australian debate.
In which case it would be better not to call the proposal AussieMac and instead call it something closer to the intent such as the National Mortgage Bank of Australia
. There were Australian bank exposures to the bundling, selling and repurchasing of high risk debt, but not in the manner there was in the US. Under a free market bad companies are supposed to fail and cease to be viable competitors on the market. So Fannie Mae and Freddie Mac should fail rather than be bundled out with external money - in this case US taxpayers.
JC at Thoughts on Freedom notes
These schleps were leveraged 35:1! And the senior staff received large bonuses for writing business and expanding the balance sheet.
Internationally, the Cunning Realist laments
where the burden will fall:
Who will pay for this? Nominally, every taxpayer. But in real terms and disproportionately, the prudent will pay via inflation. ... If people really understood what was going on here - essentially a system of "soft slavery" in which an ever-increasing amount of one's daily labor subsidizes Wall Street and the speculator class via inflation and the socialization of risk - they'd be in the street. Of course very few do understand it, which is what policymakers count on.
I am not so cynical yet, but it is hard not to be disheartened.
Most Popular on South Sea Republic
The articles that have been viewed the most:
Most Popular Restaurants in Phoenix
Phoenix Eats Out
is the restaurant review site for Phoenix
and Old Town Scottsdale
which lists the modernist and contemporary restaurants, taverns and bars in the greater Phoenix area.
This is the list of the most popular restaurants pages from phoenixeatsout.com that have been viewed the most;
My personal favourite restaurants in Phoenix are AZ88
, Humble Pie
, Orange Table
, The Vig
and others coming close behind. View the complete list with the photo-journalistic style images on phoenixeatsout.com
Most Popular Hikes in Arizona
Arizona is an outdoor state and has lots of hiking in the city and around the state. Phoenix is unusual for most cities in having several large mountains in the center of the city with great hiking. Anyone who comes to Phoenix has to do the Echo Canyon trail on Camelback
and the Summit Hike on Squaw Peak
or Piesta Peak. The views of the city, suburbs and surrounding mountains are wonderful from Camelback and Piesta Peak.
For more experienced hikers there is the McDowell Mountains in North Scottsdale that has several difficult and strenuous hikes in Tom's Thumb
and Bell Pass
. Alternatively, you can hike the highest mountain in Arizona. At 12,600 feet Humphrey's Peak
is a long and difficult hike.
Alternate Australian Constitutions
Between 2004 and 2009 this site, southsearepublic.org
, was a constitutional blog based on scoop which focused on Australian and global constitutional issues.
One of the strongest aspects of it was the development of constitutions by those involved in the blog. These constitutions are the outcome:
The constitutions were built using principles from Montesquieu's separation of powers, the enlightnment's universal political rights and the ancient Athenian technology of sortition and choice by lot.
Archives For South Sea Republic
South Sea Republic started in 2004 as an Australian constitutional blog in 2004 based on scoop software. It was an immigrative outgrowth of Kuro5hin. The archives for each year since then;
The articles are ordered by views.
Who Is Cam Riley
I am an Australian living in the United States as a permanent resident.
I am a software developer by trade and mostly work in Java and jump between middleware and front end.
I originally worked in the New York area of the United States in telecommunications before moving to Washington DC and
working in a mix of telecommunications, energy and ITS. I started my own software company before heading out to
Arizona and working with Shutterfly. Since then I have joined a startup in the Phoenix area and am thoroughly enjoying myself.
I do a lot of photography which I post on this website, but also on flickr. I have a photo-journalistic website which lists
the modernist and contemporary restaurants in phoenix. I have a site on the Australian Flying Corps [AFC]
which has been around since the 1990s and which I unfortunately
lost the .org URL to during a life event; however, it is under the www.australianflyingcorps.com
The AFC website has gone through several iterations since the 90s and the two most recent are Australian Flying Corps Archives(2004-2002)
Australian Flying Corps Archives(2002-1999)
which are good places to start.
Websites Worth Reading
Websites of friends, colleagues and of interest;