Streetwise Professor

Barney Frank has admitted it.  He was wrong about Fannie and Freddie:

“I hope by next year we’ll have abolished Fannie and Freddie,” he said. Remarkable. And he went on to say that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.”

When I asked Frank about a long-term phase-out plan that would shrink Fannie and Freddie portfolios and mortgage-purchase limits, and merge the agencies into the Federal Housing Administration (FHA) for a separate low-income program that would get government out of middle-income housing subsidies, he replied: “Larry, that, I think, is exactly what we should be doing.”

Well, I guess several hundred billion dollars of losses is enough to convince even Barney.  (No similar mea culpa from Chris Dodd.  Putz.)

That’s fine as far as it goes, but one would have hoped that this recognition that his judgment in matters financial was fundamentally flawed would have led Frank to  show a little more humility in his recent legislative doings.  But one would have hoped in vain, for Frank and his partner in slime Dodd were the creators of the monster that is Frank-n-Dodd.  So what I wrote in September, 2008 holds:

And that’s where the real moral hazard lies. At root, moral hazard exists when a decision maker is not accountable for his actions, when he is able to reap the benefits but somebody else pays the costs. Due to the arcane nature of the GSEs, the ability of Congress to deflect attention, the advantages of incumbency, and myriad other factors, Barney Frank and Chris Dodd and the others in Congress who have protected Fannie and Freddie at every turn will never, ever, pay a political cost for their actions. They have reaped the political benefits, in the form of campaign contributions and the channeling of Fannie and Freddie funds to their pet political causes in housing, but you and me and every other taxpayer will have to pay to clean up the mess. Few people who matter–the constituents of Frank and Dodd et al–will understand the connection between their actions and the F & F blowup, and what’s more, the costs are spread broadly among all taxpayers, the vast majority of whom would be unable to exact a punishment on the perps even if they had the information and incentive to do so.

So Frank paid no price for the havoc he created.  “Whoops. Sorry!”  Doesn’t quite cut it now, and in light of what he now realizes, it is doubly reckless to be a primary architect of a wholesale reengineering of the financial markets.  So this holds true too:

WTF are the people who bear tremendous personal responsibility for one of the most costly aspects of the crisis–and what is arguably a key underlying cause of the crisis–doing in charge of “fixing” the system instead of donning sackcloth and squatting on a pile of ashes, begging abjectly for forgiveness?

If Frank really means what he says about abolishing F&F, why didn’t he even make a start along that path in his most recent legislative “achievement”?

And the recent summit on housing finance policy makes it plain that the government is almost certain to continue to wreak havoc in the housing market, even if it doesn’t do it through F&F.  And the scope of the intervention looks ready to balloon:

The Federal Housing Administration (FHA) will offer financial institutions holding mortgages worth more than the value of the houses, so-called “underwater” mortgages, a guarantee on 90 percent of the mortgage value if the institution will write-off 10 percent of the mortgage. These risky mortgages have been bought up by Wall Street investment banks at may be 30, 40 or 50 cents on the dollar. The government now says that if the holder takes 10 percent off the mortgage, the government will guarantee 90 percent of the mortgage. So they may have bought a $400,000 mortgage for $200,000. If the mortgage holder agrees to write-off $40,000, the government will guarantee the mortgage for $360,000.

I presume that this is intended to be a political initiative intended to buy popular support prior to November’s elections.  If so, I think it is a grave political miscalculation, as well as an economic one.

Remember that the whole Tea Party movement grew out of a rant by Rick Santelli.  And what was Santelli ranting about?  He was ranting about “how many people want to pay for your neighbor’s mortgage?”  What does this FHA initiative do?  Have the government guarantee your neighbor’s mortgage, meaning that if s/he doesn’t pay–you will.  And given that many mortgages are far more than 10 percent underwater, pay you will.

Santelli Rant

There is already bailout fatigue in the country, and this will make it all the worse.  Especially given the fact that a disproportionate share of the dough will flow to people in a few counties in a few states.  If this happens, it will only stoke the anger.

When it comes to housing, the government just can’t leave well enough alone.  Barney Frank has that figured out.  Sort of.  Will he commit himself with ever fiber of his being to help others have a similar come to Jesus moment?  Given the havoc he caused, he owes nothing less.  Because sorry just ain’t enough.