Tom Barry

The cost of rescuing Fannie and Freddie?

In light of the last couple of weeks' events, this July post from Congressional Budget Office Director Peter Orszag is worth a second look: 

 A final point to note is that a strong argument can be made that if the Treasury used the proposed authority, the GSEs' operations should be incorporated directly into the federal budget. That is, the proposal, especially to the extent it would result in any government acquisition of an equity stake in the GSEs, raises a significant budgetary question.

The CBO stands behind this since the bailout of Fannie and Freddie: 
  
...it is CBO's view that the operations of Fannie Mae and Freddie Mac should be directly incorporated into the federal budget. The GSEs' revenue would be treated as federal revenue and their expenditures as federal outlays, with appropriate adjustments for the manner in which credit transactions (like a mortgage guarantee) are reflected in the federal budget.

The Office of Management and Budget disagrees:

After extensive consideration and discussion with the Department of Treasury and various stakeholders, I have decided to maintain the GSEs' (Government Sponsored Enterprise) non-budgetary status.

I'm not sure what the right answer is. On the one hand Fannie and Freddie are in conservatorship and run by the FHFA. But they also operate as fully capitalised corporations. The quasi-governmental status of Freddie and Fannie continues to vex those who want black and white answers.  

Posted at 15:49 23 September 2008 by Tom Barry  |  Comments[1]

Regulating the regulators

The ever-interesting Tyler Cowen from Marginal Revolution is writing in the New York Times about regulation:

In short, there was plenty of regulation - yet much of it made the  problem worse. These laws and institutions should have reined in bank risk while encouraging financial transparency, but did not.

Tyler's point applies beyond financial markets. We can get lost in the day-to-day grind of designing and implementing regulations. And forget that rules are not ends in themselves. They should be designed to achieve a final end. Regulations are regrettable interventions when private actions do not deliver socially acceptable outcomes. But endless pages of specific rules make the relationship between regulator and regulated into a game. How can you comply with the letter and not the spirit? How can you exploit the inevitable gaps for profit?

There are some grounds for optimism. Governments have got much better at writing the rules, especially in environmental standards. 30 years ago, we'd have tried to cut carbon emissions by writing individual rules for each industry. Every car would have an exhaust gas level to meet. Every home would have had to lay 5 inches of insulation in the attic. Now, almost everyone agrees that market-based prices (either taxes or permits) would deliver the outcomes at a fraction of the cost of phone directory-sized mandates. I'm hopeful that a lot of the lessons from environmental regulation can be applied to other sectors where regulation seems to have become part of the problem, not part of the solution.

Posted at 12:26 16 September 2008 by Tom Barry  |  Comments[1]

Bailing the boat

"As a small boat sailor, I understand the case for bailing like crazy to stay afloat ... [O]nce the situation has stabilised the skipper had better pay attention to his course lest he end up on the rocks."

That's Bill Poole, the former President of the St Louis Federal Reserve, talking at the MacroAdvisers Conference yesterday. He was supportive of the bailout of Fannie and Freddie but his main worry was that the limits of who gets a bailout were sketchy. What about a major airline? Or an auto manufacturer?

"The Fed said no to New York City in 1975 and no to Chrysler in 1979; with the Bear Stearns precedent, it will not be so easy to say no next time."

Like much of the reaction, Poole seems to acknowledge the necessity of the recent bailouts but worries about their long-term consquences for risk taking and moral hazard. Short of throwing away the bailer, I don't know how a captain could credibly promise not to bail when needed. And what government would be able to throw away a bailer?

Posted at 13:41 12 September 2008 by Tom Barry  |  Comments[0]

Saving Fannie and Freddie

The Wall Street Journal's reporting that the US Treasury (via the new FHFA) will put Fannie and Freddie into "conservatorship" on Sunday evening:

The Federal Housing Finance Agency, Fannie and Freddie's regulator, is to use its legal powers to put the companies under conservatorship. Those powers allow the FHFA to run the companies indefinitely, under certain conditions, such as when the regulator finds that they are likely to be unable to meet their financial obligations ... Dividends on the companies' preferred stock are likely to be suspended, people familiar with the plan say, and those on common shares to be eliminated.

And the top executives of the firms will lose their jobs.

Does this mean any more than the good folk at the Treasury and Fed missing yet another weekend away from their families? Oddly, commentators seems almost blasé about it. It's almost like the crises of the last year have numbed us to the shock of extraordinary events. At some stage regulation across the world will have to catch up with events. Clear rules make everyone's lives much easier.

Posted at 12:36 09 September 2008 by Tom Barry  |  Comments[0]