Fannie, I wish I'd never seen your face
By Colby Cosh - Friday, May 27, 2011 - 67 Comments
This transcript of a public-radio interview with New York Times finance writer Gretchen Morgenson is long. I would have everyone read it anyway. Like the Great Depression before it, the Great Recession has put free markets on the defensive. It’s not quite clear to me how fair this is. It is surely fair at least to some trivial degree, in the sense that markets are ultimately made up of regrettably fallible humans, prone to superstitions and herd behaviour and poor judgments of risk. But everyone seems to have managed to take the lesson that is most convenient for himself from the crisis; for those on the left it has been “markets fail”, and for those in the muddled mixed-economy middle it has been “regulators fail to smack those nasty markets back into line”.
What I see when I look at the origins of the financial pandemic is the story “government-sponsored enterprises that subsidize crazy lending practices and puppetize legislators fail.” Mortgage-writing institutions did things throughout the late 1990s and early oh-ohs that weren’t just likely to turn out badly; they made enormous amounts of loans that were practically certain to go bust in the short-to-medium term, loans that your mother could have told you would go sour. It wasn’t a “free” market that relaxed mortgage underwriting standards to the point of annihilation; it wasn’t a “free” market that put unskilled workers in million-dollar homes in the Sand States, or that spent too long ignoring the rising default rates that resulted. Continue…
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Econowatch
By Jason Kirby - Friday, October 30, 2009 at 8:30 AM - 4 Comments
A weekly scorecard on the state of the economy in North America and beyond
Forget what economists have told you about how stimulus programs are supposed to function during a recession. You can learn a lot more from watching a master illusionist at work.Take America’s US$8,000 tax credit for first-time homebuyers. Like any stimulus measure meant to jolt the economy out of recession, the tax credit was always more about smoke and mirrors than economic theory. When Washington created the program eight months ago, its aim was to conjure the illusion of stability in the housing market. Until the free fall in house prices could be halted, a broader economic recovery could never take hold. Continue…
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Inside the meeting that saved the world
By Andrew Coyne - Tuesday, October 13, 2009 at 1:45 PM - 30 Comments
ANDREW COYNE: How the seven richest nations went all in on a plan that brought the global economy back from the brink
The meeting was not going well.On Friday, Oct. 10, 2008, finance ministers and central bankers from the Group of Seven leading industrial economies had gathered in Washington for their regular fall meeting. The circumstances, of course, were anything but routine. Four weeks after the collapse of Lehman Brothers, the 158-year-old Wall Street institution, the financial world was in a state of escalating panic. With banks toppling one after the other, stock markets in a death spiral, credit markets all but disabled, the meeting had taken on crucial significance.
Around the world, investors were looking to governments for salvation—only they could provide the kind of rock-solid assurances that might put a floor under the markets. A strong, united statement from the G7, and there was some hope of restoring sanity to the situation. A weak statement, or worse, a failure to agree, and the entire world financial system might well tip over the edge. Continue…
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Surprise! You invested in credit swaps.
By Duncan Hood - Thursday, November 6, 2008 at 12:00 AM - 1 Comment
Now regular investors can lose it all just like the pros
The fallout from the financial meltdown is getting stranger and stranger. Almost everyone with an RRSP has already been scorched by falling stocks, but it turns out that thousands of Canadians have, in some cases inadvertently, put their savings directly into complex financial instruments called credit default swaps. Now they could lose every penny.
Jim Cougle, a 59-year-old field manager in Fredericton, N.B., was one such investor. He says his broker approached him with what looked like a conservative investment a few years ago to supplement his retirement income. He thought he was investing directly in a basket of top-rated corporate bonds, and as he says, “what could be safer than that?”
But when the financial crisis hit, he started getting letters warning he could lose all his money. Eventually, he was “flabbergasted” to learn that his investment, called ROC Pref III Corp., essentially consisted of about 125 credit default swaps on corporate bonds. The problem is, some of those bonds were issued by firms such as Lehman Brothers, Fannie Mae and Freddie Mac—which had either gone bankrupt, or were close to it. Continue…
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Was bailing out Fannie and Freddie the right thing to do?
By Duncan Hood - Monday, September 8, 2008 at 6:12 PM - 13 Comments
Okay, hear me out. I understand that if the U.S. government hadn’t stepped in…
Okay, hear me out. I understand that if the U.S. government hadn’t stepped in and taken over Fannie Mae and Freddie Mac (I still can’t get over those names), then the mortgage giants would have exploded. Given that they back about half of America’s $12-trillion or so in home mortgages, that would be a very bad thing. But here’s the thing: By stepping in a bailing Fannie and Freddie out, the government didn’t solve the problem, they just diluted it.
Now, instead of the misery being concentrated among those folks who knowingly placed a bet on Fannie and Freddie — such as the bondholders who lent them money — the misery will be spread out among American taxpayers from coast to coast. Is that really fair? Should regular citizens who acted prudently and tried to avoid this mess by not investing in Fannie or Freddie, not loaning them money, and not taking on ridiculous mortgages of their own, now be forced to help bail out the people who did? Because that’s what this amounts to. The money’s going to have to come from somewhere. Continue…
