Let them fail

The transportation special session had barely ended when the troubles of Fannie Mae and Freddie Mac began to dominate MSM reporting (oddly enough, bloggers have been largely quiet about it).  I mention that juxtaposition because it enabled a few things to come into focus and stark clarity, leading to one ominous, painful, yet inevitable conclusion: we must let these mortgage giants fail. That’s right: fail - as in declare bankruptcy, fall into receivership, have the assets unloaded, etc.

If one looks at several issues we face here in Virginia and elsewhere (traffic, environment, land-use, the ”popped” real estate bubble, inflation, etc.), one finds that much of it is driven by settlement patterns that Jim Bacon has been skewering for years (inflation is the obvious exception, I’ll get to that one later).  Oddly enough, Bacon et al seem to miss the biggest factor in leading to spread-too-thin settlements and all the problems they cause - government-driven, artificial inflation in the demand for property, and the two biggest culprits are Fannie Mae and Freddie Mac.

Fannie Mae began in 1938 as the Federal National Mortgage Association a New Deal government agency set up to provide loans to banks that they themselves could loan out to homeowners (David Fum, National Post).  Since these were government loans created from a policy deliberately designed to make homes “affordable,” the banks treated it like the free money it really was, and loaned it out like they were supposed to do.  Thus did the government begin artificially inflating property demand (to hear FDR fans tell it, the FNMA was just part of the great New Deal vision that rescued America from the Depression; more and more economists now understand that the rescue can be best attributed to World War II).

For thirty years, FNMA kept property demand artificially high (which likely had a lot to do with the first suburban wave of the post-World War II era), but by the 1960s, the program was doing its job so well that it was becoming a budgetary eyesore.  So the Johnson Administration decided to “privatize” it.

Why do I put it in quotes?  Because Johnson’s motives were hardly pure (Frum):

In 1968, the Johnson administration decided to privatize Fannie — not for any free-market reason, but because the federal government’s debt was rising fast, and the administration realized it could make the government’s accounts look better by moving Fannie Mae’s obligations off the books.

In other words, LBJ had no problem with the government continuing to underwrite the mortgage industry; he just didn’t want the accountants to notice.  So instead, he and the Congress of the time (Democrat-dominated, although I doubt the pre-Reagan GOP would have done much better) came up with a half-hearted scheme that moved FNMA cost off the government books but still gave it all the perks of a government agency (no real regulatory oversight, White House appointments to the the board of directors, and - here’s the kicker - Fannie Mae never had to pay taxes).  Making matters worse, the Congress and LBJ created a second such monster (the Federal Home Loan and Mortgage Loan Corporation, a.k.a. Freddie Mac) as “competition” for the new “private” Fannie Mae.

So now, there were two companies, both ostensibly private but with obvious government favors, government ties, and the implied government backing that came with them, artificially driving up property demand for forty years.

Until about ten years ago, that meant suburban stretched farther and farther out.  Then the campaign against “sprawl” went national.  Spurred largely by liberals at the national level and a politicalhodgepodge at the local level, the movement focused not on the demand for developed property, but the supply.  The result was a slew of zoning regulations, purchase of development rights programs, proffer demands - and, inevitably, a steep upward climb in home prices as demand lapped supply.

The final nail in the coffin came in the mortgage rush of the early 21st century.  We’ve all heard about folks signing up for mortgages they couldn’t afford, and lenders who ignored economic reality and let them sign.  How much attention, however, has been given to the government-sponsored corporations who continued to make it far easier and more profitable for lenders than any free-market would allow?  Even when Fannie Mae was caught inflating its own profits by $6 billion (roughly four times the size of Enron’s transgression), not a thought went to what this meant for the housing market.

Well, supposedly, we all know better now - except that no one is considering the one option that will ensure these mistakes are never repeated: letting these two behemoths fail.

For starters, the collapse of Fannie Mae and Freddie Mac will put a swift end to the nonsense of ”government-sponsored enterprises” (yes, that’s their name).  An organization can be a private firm or a government agency, but not both.

More importantly, all of the housing-based issues that we are facing today (everything I listed above except inflation), wold be consigned to history, because the demand for property will finally be restored to its natural level.  On the financial front, that removes the danger of future massive housingcorrections like the one we’ve seen recently - a correction that has placed so much pressure on the Federal Reserve to keep interest rates low that the American economy is almost entirely disarmed from fighting inflation (unless Congress is willing to reduce overall demand pressure by cutting spending - yeah, I know, they’ll start with the Flying Pork Squad).  On the “quality of life” front, it means the inflated property demand that led to “sprawl” in the first place would vanish.

Now, I don’t expect our political leadership to have the courage to let Fannie Mae and Freddie Mac fall, especially not in an election year.  If these companies must survive, then they must become companies, forced to act like any other private firm with the same risks, obligations, costs, etc.  If the free market has a genuine place for Fannie Mae and Freddie Mac (and it probably does, but not to the tune of $5.3 trillion in mortgage debt holdings), then let them find and operate in that place.

The important thing is - get the government out of the real estate business, once and for all.

Why the housing market may take a turn for the better (if the government stays out of the way)

It is no secret that the weak housing market is the biggest drag on the economy these days.  MSM is full of homeowners worrying about dropping home values and/or struggling to keep up with payments.  The biggest “culprit” is the adjustable rate mortgage (ARM), which has sent the mortgage payment of many a homeowner skyward in the last couple of years.  Yet what taketh away can also give back, so long as the market is allowed to run its course.

The ARM discussion is personal for yours truly.  We refinanced our home with an ARM three years ago.  Like everyone else, we blithely assumed real estate values would continue to rise, and thus we could “refi” again before the fixed rate period ended.  I assumed that Northern Virginia would be immune from any drop in residential demand due to the expanding Federal government and several counties adopting slow-growth policies.

Needless to say, I got that horribly wrong, and thus, like most Americans with an ARM, my family faced a troublesome future once the adjustable rate kicked in.  So, we planned for said future.  I started looking for a higher-paying job, and found one, but as a consequence I had to scale down my political activity for a while.  This meant I had to “go dark” for a few months, and also pass up a ready-to-launch campaign for my local school board.  Still, it was the right thing to do.

However, my adjustable rate will not take effect until the July of this year.  More to the point, as we were nervously preparing ourselves for the higher payments to come, events in the market completely altered the outlook of not just my ARM, but just about every ARM in the business.

What happened?  Well, as most already know, the housing swoon and Fed Chairman Ben Bernake’s desperate attempts to keep the problem localized to housing took its toll on interest rates.  In fact, interest rates today are dramatically lower than they were even last year - including the interest rates that are used to set the adjustable rates for ARMs.

Now, my story may not be typical, but based on my elemental research, it’s fairly close.  My adjustable rate will be based on what is called the Constant Maturity Treasury Index (in my case, the weekly version).  Since I’ve started tracking it (about a month ago), I have come to the stunning realization that if interest rates stay where they are right now, my adjustable rate will be lower than my current fixed rate (at present, my rate would fall a full percentage point).  Since the overwhelming majority of ARMs use the CMT in some form, this could mean millions of homeowners are due an unexpected windfall over the next few months.  This would also be true of folks who are already in the adjustable phase of their mortgage; in fact, given where the rates were during the last adjustment period, the savings could be even more dramatic.

This could have tremendous implications for consumer confidence (up), economic expectations (up again), home values (at the very least, the plummeting drop would slow down, and perhaps even stop), and of course, the 2008 elections (the GOP could be in a much better position than they are now).  All we would have to do is sit back and let the low interest rates take care of things.

The cynic in me doesn’t see it happening, though.

Lest we forget, there are other players here - namely the mortgage holders.  While most homeowners may not be expecting the rate to drop, the mortgage firms and banks certainly know what’s coming, and will do whatever they must to prevent it from happening.  This in part explains why they were so eager to go along with the voluntary ARM rate freeze last fall.

Still, I’m guessing these firms will look to lock in these rates without relying on ignorant homeowners to do it for them.  So don’t be surprised if some legislation pops up in Congress mandating ARM rate freezes for at least a year, with the full support of “understanding” and “sympathetic” mortgage firms (I’m actually surprised I couldn’t find one already when I started looking over the weekend).  If too many homeowners remain unaware of the bounty that would be headed their way, they will gratefully accept this “stabilizing” idea without realizing what they have allowed Congress to do to them.

So, if you have an ARM like I do, take a look at how the adjustable rate is derived; then track the initial source rate.  Odds are, you have a rate reduction in your future, too, so long as you don’t let the mortgage firms and Congress pull the wool over your eyes.

Don’t let them.

In the UK, "every parent in the land" is at risk for identity theft now

The British government’s admission that it has lost the personal financial data of 25 million people continues to reverberate. The best synopsis comes from the Spectator (UK) Coffee House (emphasis added):

There were genuine gasps of amazement in the chamber when (Minister) Darling unveiled the scale of this disaster. If you have a child, and receive child benefit, your bank details are right now on the loose. Sort code and account number, together with your address and age of your child – details of 25m people in 7m families: every parent in the land. This data goldmine was downloaded onto two CDs on 18 Oct by a “junior official” (the fact that it’s so easy to do this is, is in itself, an outrage) and sent from HM Revenue Customs & Excise in Newcastle to the National Audit Office in London (who say they never asked for such detail in the first place). The CDs never arrived. And no one has a clue where they are.

A couple of initial thoughts:
1) If I’m Gordon Brown, I tell my Labor party cronies to get ready for the next election in 2010 - and then pray the WBK War goes so bad that he can use the World War II precedent and extend Parliament past that date. Why do I say that? Check out this line from the Coffee House’s Fraser Nelson: “the British public (feel) . . . raw, visceral hatred towards this government . . . we have just witnessed Labour’s Black Tuesday.” The last line was a mirrored reference to the Conservative Party’s “Black Wednesday,” when market forces drove the British currency off the Exchange Rate Mechanism - a moment of spectacular economic mismanagement and political embarrassment that soured British voters toward the Tories and has kept them out of power in every election since.

Black Wednesday was in September of 1992.

2) While most reaction involving government policy has been to hail this is the “death of ID cards,” I think we may see a greater revulsion against government programs of all kinds. Keep in mind, this fiasco happened because the British government was collecting data for a public benefit for children - exactly the kind of entitlement program we have here for people of all ages. In this era of electronic transfers, data sharing, and identity theft, the government program that in the past meant “free” money with the vague concern of overreaching government now means an open invitation to becoming a victim of fraud.

Moreover, when the greatest enabler of said fraud is found to be the very folks trusted to keep the data secure, more and more voters may look at the next (or even current) set of entitlement programs the way Dr. McCoy viewed the Genesis project (Thinkers and Jokers):

Spock: “I do not dispute that in the wrong hands–”

McCoy: “‘In the wrong hands’? Would you mind telling me whose are the right hands, my logical friend?”

If I’m right (and that’s an admittedly big “if”), the welfare state may finally have met its match, and we’ll have an incompetent, lefty Labor government to thank for it.

Your (well, their) government at work, losing the personal data of millions

I can almost hear Leslie Carbone and Rick Sincere screaming in my ears . . .

From “across the pond” in the UK (the news, not the bloggers) courtesy of Brit Tory blogger Iain Dale (emphasis added):

I have a pensions policy and an endowment with Standard Life. I’ve just heard that the financial details of 15,000 Standard Life customers have been lost by HM Customs & Revenue. On top of this HM Revenue & Customs have lost more personal data in a much wider breach of security. It is scant consolation that the Chairman of HM Revenue & Customs has taken responsibility and resigned. I suppose it is too much to ask for a Treasury Minister to take responsibility too.

UPDATE: Unbelievable. They have lost 7.5 million records relating to child benefit. There has to be political accountability here.

To make matters worse, what wasn’t lost was sent via the mail to constituents (Dale again, emphasis added):

I’ve been contacted by someone who, a few weeks ago, wrote to their MP enclosing a copy of a CD containing confidential information about HMRC Tax Credit Office clients that had been sent in error by HMRC to him.

This person had called HMRC asking for a CD audio copy of telephone conversations they’d had with HMRC when discussing their Tax Credit award. HMRC sent them a CD not only with their recordings but with two hours’ worth of recordings from people right across the country containing bank details, NI Numbers, addresses, phone numbers, details of which schools people’s children went to etc.

I’m told the MP forwarded the letter and CD to a Minister asking if they could ascertain if this was a more widespread problem within HMRC. So far, no reply has been forthcoming.This seems to be further evidence that this misuse of public data is widespread within government.

If HMRC has breached the Data Protection Act then presumably they can be held liable in the courts - by 15 million people… The mind boggles.

As one would expect, it has become a major scandal in Britain, where the Labor government (now under the control of Gordon Brown, and thus a barren field for Bush-haters) is trying to force all Britons to carry national ID cards (on that, Dale chimes in: “Today marks the death knell of identity cards” - I hope and pray he’s right).

Dale has quite a few other witty observations on the debacle (here, here, here, here, here, and here) - and for those counting, the number of Britons affected by “lost” data now stands at 25 million (Conservative Home) - but the best quote so far comes from this Dale post:

Ronald Reagan once said that the most frightening sentence in the English language is . . . Trust me, I’m from the government and I’m here to help. Never a truer word spoken, especially today.