The WSJ Editorial Page: Fumbling Toward Accuracy II
The editors of the WSJ agree with Brad DeLong that the Fannie/Freddie problem is that their short-term cash flows may be(come) impaired:
The most immediate danger is that investors will shrink from rolling over the debt of the two companies, leading to a run a la Bear Stearns….With so much on the line, we’ve been suggesting that Treasury and Congress step up now with a public capital injection to help [Fannie Mae and Freddie Mac] ride out their losses.
So let me see. The solution to avoiding spending taxpayer monies is…spending taxpayer monies? Let’s see how quickly they backtrack:
Yes, this would mean putting some taxpayer cash up front, but in the cause of avoiding the far greater risk of a collapse or Bear-like run. If the capital injection was made in the form of a subordinated debt or preferred stock offer, taxpayers would get a stake in the companies and some return on their investment once the crisis passes.
Isn’t this usually what gets done in the “free market”? In fact, iirc, The Big C has done this a few times recently.* Why should FNMA and FHLMC be different?
We haven’t suddenly become socialists. What taxpayers need to understand is that Fannie and Freddie already practice socialism, albeit of the dishonest kind. Their profit is privatized but their risk is socialized. We’re proposing a more honest form of socialism, with the prospect of long-term reform. [emphasis mine]
The above paragraph is something I could have written. And probably have. And it only gets better:
In return for putting up the cash, the taxpayers would also need some reassurance that this Fan and Fred debacle couldn’t happen again. Thus their regulator would need the power to shrink their portfolios of mortgage-backed securities that have made them such high-risk monsters, and ultimately to wind the companies down. Apart from outright failure, the worst scenario would be a capital injection that left the companies free to commit the same mayhem all over again two or 10 years from now.
You got it, folks. The WSJ has just come out in favor of (1) a government bailout and (2) more regulation of, effectively, an industry.**
But wait. Did you catch the shift? Let’s try it again:
Thus their regulator would need the power to shrink their portfolios of mortgage-backed securities that have made them such high-risk monsters, and ultimately to wind the companies down.
Whoop, there it is! Same old WSJ. Save the mortgage market just to destroy it. Which must be why, since (see the DeLong link above) Fannie and Freddie are solvent in the long-term, they go on to object to one option:
On Friday, Senate Banking Chairman Christopher Dodd (D., Conn.) declared that Fannie and Freddie are “fundamentally strong,” that fears about their capital are overwrought, and that “this is not a time to be panicking about this. These are viable, strong institutions.” Yet he also said that one option under discussion is to let the two companies borrow from the Federal Reserve’s discount window.
Let’s see. We have a short-term cash flow issue that may arise. Two possible solutions are: (1) ensure that the firms have a borrowing line available that is both higher than the FedFunds rate*** and perfectly in keeping with the implicit guarantee of their loans or (2) add some cash now, but with the goal of eliminating the firms, probably just about the time the U.S. housing market starts to recover.
If that second is the case, will their auditors be allowed to say, “Since you don’t intend this to be an ongoing concern, we aren’t going to bother to dig too deeply?”
The WSJ piece ends with a classic “disregard what we’ve said for the past several years, especially the David Malpass and Larry Kudlow editorials”:
If there’s any other good news in all this, it is that the scandal of Fannie and Freddie is at last coming into public focus. The Washington political class has nurtured and subsidized these financial beasts for decades in return for their campaign cash and lobbying support. Wall Street and the homebuilders also cashed in on the subsidized business, and also paid back Congress in cash and carry.
The losers have been the taxpayers, who will now have to pay the price for this collusion. Maybe the press corps will even start reporting how this vast confidence game could happen.
Dear Press Corps: please start by examining the WSJ’s continual “everything is good because house values keep appreciating” pieces.
*Yes, I know they have. Just don’t have time to find links now.
**Since Fannie and Freddie-backed mortgages make up a large majority of the industry; op. cit. here.
***I’ll stop making fun of the “Discount” Rate when it goes back to being a Discount Rate. Possibly, the next President will be sane.