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Kudos on Offer:

The standard line of many liberal bloggers on any issue that in any way involves regulation or deregulation is that the evil Bush Administration, in league with free market ideologues, has thwarted very efforts at sensible regulation of large corporations.

In the specific case of Fannie Mae and Freddie Mac, however, it appears that, among others, the Bush Administration, free market think tanks, and Alan Greenspan (and, to be fair, the Clinton Administration) have been calling for years to rein in these institutions, only to be thwarted by Congress, with Democrats especially willing to protect Freddie and Fannie from oversight and reform. See articles from the Times ("attempts to push through stronger oversight were stymied because few politicians, particularly Democrats, wanted to be perceived as hindering the American dream of homeownership for the masses") and the Post.

Kudos to any liberal bloggers who acknowledge that this particular example of corporate malfeasance doesn't follow their script. It does, however, illustrate a potential pitfall of deregulation or privatization or public-private enterprise or whatnot: never privatize the profits while socializing the risks.

Bruce:
The standard line of many liberal bloggers

I haven't found any political blogs of any stripe to be a source of stunning insight.
7.13.2008 9:25pm
blabla (mail):
Kudos probably should be awarded to Obama, too, who appears to now understand the problem:

"There are a lot of different definitions of what a 'bailout' would look like," Sen. Obama said. "There are issues related to the short-term liquidity — can they borrow money? — versus issues related to whether the underlying assets of the two corporations are really unsound. And I think we need to watch carefully and see how it plays out before we make a decision about which steps need to be taken."

(from a WSJ article)

This is much better than a month or two ago, when he was talking about "siphoning" off Fannie and Freddie's profits to pay for various social programs. I'm hoping that the difference between his position then and his position now is a result of the influence of his somewhat moderate bevy of economists. Hopefully this indicates that he will reconsider many of his other liberal economic positions after he has a chance to discuss them with his advisers.
7.13.2008 10:07pm
Adam B. (www):
I think this analysis utterly misses liberal bloggers' general skepticism of increased campaign finance regulation.
7.13.2008 10:40pm
BP:
blabala,

Imposing a tax on Fannie and Freddie's profits is actually preferred by economists. It's a classic Pigouvian tax. Fannie and Freddie's implicit government guarantee creates an externality, where the potential costs of defaulting are borne by the taxpayers, and the moderate tax on Fannie and Freddie's profits internalizes the externality.

Harvard economist Ed Glaeser, a well-known conservative, prominently praised the idea in a 2006 article, What To Do About Fannie and Freddie?. Every economist knows about the GSE externality (why do you think Republicans have been trying to distance the government from the GSEs in the first place?). Every economist also knows that a tax on the GSEs' profits would improve efficiency. It's very basic stuff.

Obama doesn't "now understand the problem" -- he has always understood the problem. Do you?
7.13.2008 11:13pm
fullerene:
Privatizing profits and socializing risks is inherent in our economic system. Fannie Mae and Freddie Mac are not being bailed out because of some long-standing implicit government guarantee. No, they are being bailed out because if the government did otherwise, the economy would crumble.

Now it is fair to ask how these two institutions got as large as they are. Government backing went a long way to bring us to this point. But certainly there are other large financial institutions that have not greatly benefited from any clearly defined government backing that would, simply based on their size alone, receive exactly the same treatment.
7.13.2008 11:28pm
Straw Man:
Am I the only one who finds Bernstein's consistent resort to stereotyping and baiting of "liberals" ...

[EDITOR: I said many liberal blogs take this line. If you want to argue to the contrary, go ahead. If not, it's not a "resort to stereotyping," it's an "accurate generalization," properly qualified by "many."
7.13.2008 11:37pm
Straw Man:
I did not intend to challenge you on what lines many liberal bloggers may take. Indeed, short of conducting a lengthy study, I'm not really sure how anyone would challenge your qualified "accurate generalization" on that issue. And that was the point I was making. Attacking qualified generalizations (as with stereotypes) is intellectually lazy and inconsistent with what readers should expect from this typically thoughtful blog. The same could be said of deleting a fairly civil comment for its critical content.
7.14.2008 12:55am
davidbernstein (mail):
Fairly civil, but at best tangential to the topic of the post. If you don't like my posts, feel free to (a) not read them or (b) complain to blogmaster Eugene. But don't clutter up the comments.
7.14.2008 1:00am
Vain Clerk:
While it is true that Bernstein could sugar-coat his commentary on the "standard line of many liberal bloggers" to make it more palatable to some left-of-center readers, I think that would only obscure the fact that he is correct here. Liberal commentators in general, (E. J. Dionne of the Post comes to mind) tend to utterly confuse libertarians and pro-market groups with being "pro-corporate subsidy," and therefore they fundamentally misunderstand the politics of the GSE situation, inter alia. I run into this issue all the time, when people are perplexed as to why I am visibly angry at industries that benefit from strong government subsidies (e.g., Wal-Mart benefiting from patent eminent domain abuse).

As for me, I'll join Bernstein in waiting for a prominent liberal blogger to say, "Wow, the Dems were wrong on this one, and the Bush Administration had a point." I shall not hold my breath, however...
7.14.2008 7:11am
Philbeach:
Ah yes, the horde of liberal bloggers so influential in Washington that they kept the Bush Administration from advancing any part of its agenda during its first six years in office. Oh, to have that kind of power....
7.14.2008 7:30am
Some Guy (mail):
The real question is, do you think if the past heads of Fannie Mae had been Republican hacks instead of Democrat hacks, that there wouldn't be nightly stories on "the Bush Administration's destruction of the mortgage market through financial fraud"?

Instead, no one says anything about the moral hazard the Democrat leaders of these two institutions KNOWINGLY created while lining their personal pockets with millions of what ultimately will prove to be taxpayer money. Say what you want about Enron, but I wasn't forced by the IRS to pay shareholders for Skilling's fraud.

But, like I said, you won't see this story popping up all that often. Heck, I'm just happy it was so utterly blatant and such a Demcrat issue that they aren't trying to blame it on Bush, anyway.

Yet.
7.14.2008 7:42am
blabla (mail):
"Imposing a tax on Fannie and Freddie's profits is actually preferred by economists. It's a classic Pigouvian tax. Fannie and Freddie's implicit government guarantee creates an externality, where the potential costs of defaulting are borne by the taxpayers, and the moderate tax on Fannie and Freddie's profits internalizes the externality.

Harvard economist Ed Glaeser, a well-known conservative, prominently praised the idea in a 2006 article, What To Do About Fannie and Freddie?. Every economist knows about the GSE externality (why do you think Republicans have been trying to distance the government from the GSEs in the first place?). Every economist also knows that a tax on the GSEs' profits would improve efficiency. It's very basic stuff.

Obama doesn't "now understand the problem" -- he has always understood the problem. Do you?"

This might not be a horrible idea for the medium or long-term. But you would agree that it would be a bad idea right now, when Fannie and Freddie seem (to some) to be on the verge of collapse? That is the point that I was trying to make.
7.14.2008 8:37am
SeaDrive:
As a reader, I think reference to the "standard line of many liberal bloggers" is lazy. Liberal bloggers, like conservative bloggers, run the gamut from important to insignificant, and from thoughtless to intellectually rigorous. An example or two (Krugman? Reich?) adds a lot of information to the post.

After all, one weighs the comments of economists differently from the comments of campaign managers.
7.14.2008 9:42am
byomtov (mail):
All the Democrats' fault? I think your quote from the Times is a bit selective. Consider what comes a paragraph later:

Fannie and Freddie were careful to include powerful Democrats and Republicans as executives, board members and lobbyists to make sure they had access to top government officials and clout on Capitol Hill, no matter which party was in power.

Plenty of blame to go around, I'd say.

As to the rest of the post, is it really inaccurate to say that the Bush Administration has been seriously anti-regulation? And isn't the objective of regulation, broadly described, often to prevent the privatization of profits and the socialization of risk?

I don't claim it's always goos at this, but certainly anti-regulation absolutism deosn't even recognize the problem
7.14.2008 11:20am
DavidBernstein (mail):
"And isn't the objective of regulation, broadly described, often to prevent the privatization of profits and the socialization of risk?"

Do you mean the textbook objective, or the objective of the actual actors in the process?
7.14.2008 11:39am
J. F. Thomas (mail):
In the specific case of Fannie Mae and Freddie Mac, however, it appears that, among others, the Bush Administration, free market think tanks, and Alan Greenspan (and, to be fair, the Clinton Administration) have been calling for years to rein in these institutions, only to be thwarted by Congress

I don't know why you are conflating the current crisis at Fannie Mae and Freddie Mac with the problems that plagued the institutions in the late nineties and early 2000's. The current crisis is caused by Fannie and Freddie taking on a bunch of bad MBS's from the banks who were lending to unqualified borrowers and creating an artificial real estate bubble. To say that the problems (which were admittedly caused by poor management, cronyism, and lack of oversight) that Greenspan and Bush were concerned about five years ago (and were pretty much resolved) are related to the current problems is just wrong--and frankly just another sorry attempt to bash liberals.
7.14.2008 11:57am
Snarky:

never privatize the profits while socializing the risks


I think it can fairly be said that there was a partial socialization of the risks when it came to bailing out Bear Stearns. And I think the same can be said when it came to bailing out Chrysler. And now, there is the bailing out of IndyMac. (Where, private depositors are getting 50% of deposits over the insured amount of $100,000.)

All this is to say that I think that this extreme idea, that we should never socialize risks that involve privatized profits, is a very bad one.

There are economies of scale to be enjoyed from large private enterprises. That is, there would be a cost to more vigorous antitrust enforcement that would prevent large private institutions from arising whose success or failure rise to the level of being a public, rather than merely private, concern. But there is also social risk that extends far beyond the boundaries of these business enterprises when they fail.

That said, there should be negative consequences for failure. But, those negative consequences should be rationally limited. We do not need an extreme principle that says we should never socialize any of the risks of institutions with private profits. Instead, we need a more sensible and moderate principle that says there should be negative consequences for failure, and positive consequences for success, and the magnitude of those consequences in either direction should be kept with reason.

We should discourage extraordinary CEO salaries through the tax code -- we should moderate the upside. And we should have some level of social insurance for companies that fail that still allows pain to be felt so as not to take the sting out of failure, but that rationally limits that pain -- we should moderate the downside.

These moderate principles, rather than these extreme principles that Bernstein gravitates to, should guide us.
7.14.2008 12:10pm
byomtov (mail):
Do you mean the textbook objective, or the objective of the actual actors in the process?

There are lots of actors, as there are on all sides in public policy battles. Their objectives and motivations vary.
7.14.2008 12:29pm
Snarky:

Do you mean the textbook objective, or the objective of the actual actors in the process?


I think this is a good point. Textbook objectives are often not really reflective of what is really going on in the real world.

I think that this point can be especially well-deployed against economists who sometimes make simplistic assumptions about the objectives of firms.

I think that the question of what really drives people, that is ("what is really going on") is an important one that is largely overlooked by economists for some reason.

What motivates government actors is obviously also a rich area for investigation. When an individual takes action to get the ball rolling in the creation of a new regulation, what is driving them? Obviously, this is a difficult question, because it is hard to get into people's head. But, it is nonetheless a very important question.
7.14.2008 12:36pm
Harry Eagar (mail):
That's a strange concept to criticize: The liberals are seduced by the siren song of free market capitalism, end up with an unwanted pregnancy and the sperm donor walks off, humming, 'Nothing to do with me.'


Can we all go back to 1936 now? I'd feel a whole lot safer with the New Dealers in charge than the current crop of ideologues, left and right, with no historical memory.
7.14.2008 12:42pm
deepthought:
Fannie and Freddie should be allowed to fail. While it will create some short-term problems, the cleansing effect of business failures only serves to improve the long-term functioning of the market. The market is telling us that F & F are not to be trusted--why argue? The market is always right. Governmental interference in the market is what has created this problem, more interference will only exacerbate the problem, not improve it.

FDIC insurance presents the same problem--banks and S&Ls know they can take inordinate risks with their depositor's money since they don't have the responsibility of replacing it if they lose the bet--the government (taxpayers) will bail them out. Few if any executives are ever held responsible for their bad decisions.
7.14.2008 12:49pm
Harry Eagar (mail):
I expect we can surmise that deepthought isn't counting on his income being eliminated by the cleansing.

Here's a thought. Rather than enjoying the crash of the two lenders, how about preventing the stupid business behavior that got us to this point?

Anyhow, the answer to the disasters of free market capitalism is not more of it. The answer is less.

Sheesh.
7.14.2008 1:57pm
MJG:
Marginal Revolution hat tips to some interesting info/commentary shedding some light on the unlikely way that the Fannie/Freddie breaks down re: liberal/conservative talking points (the first being from Felix Salmon paraphrasing Hank Paulsen, the second from Calculated Risk):
We can't afford for Fannie and Freddie to go bust, and we're Republicans, so there's no way we're going to nationalize them. And no one could conceivably afford to buy them. Which leaves only one option: somehow maintaining the status quo. Which is not going to be easy, seeing as how their trillions of dollars in assets are imploding daily in the biggest US housing crunch since the Great Depression.

And

The irony of the "subprime" situation, it seems to me, is that we probably all would have been better off if the GSEs had gotten into it in a big way. If the GSEs had been able to create a market in "vanilla" subprime--fixed rates, no prepayment penalties, careful documentation requirements, competitive pricing--and forced their seller/servicers into a "subprime box," the subprime loan market would have been a lot better off. The "pseudo-Maes and Macs" have never really been very good at providing the kind of market discipline within their purview that the real Mae and Mac have. But we wanted "innovation" and "choice" and "flexibility," not domesticated subprime and "alt" financing with low margins, uniform loan terms, and front and side airbags.
7.14.2008 2:57pm
Ohismith (mail):
Hang on a sec here--I thought the Republicans were in charge of Congress during most of the time period you are talking about. You are actually arguing that as soon as the Democrats took over in 06 they should have changed the system on this issue? Come on, get real.
7.14.2008 3:02pm
nick:
David Bernstein: never privatize the profits while socializing the risks.

This was also the problem with savings &loan "deregulation" that led to the S&L crisis and with California's electric utility "deregulation" that led to its 2001 power blackouts. It's also a problem with government contracting out functions, i.e. paying tax dollars out to contractors, with the suggestion that this is "privatization" that will bring similar benefits as real privatization. It is no such thing.
7.14.2008 4:30pm
deepthought:
Fannie & Freddie are private companies, listed on the NYSE. They are the only private companies, apparently, that the Federal Govt. has guaranteed against market failure. The Bush Admin. proposal to offer them cash through the Federal Reserve and through the purchase of stock in F & F is the first step toward eventual nationalization of the secondary mortgage market.

I guess the free market philosophy only goes so far--we will deregulate your market but if you get into trouble, don't worry, we will bail you out (but only if you are a favored industry giant, not a homeowner or small business). Now is time to stop the madness.
7.14.2008 4:58pm
Harry Eagar (mail):
No, 14 years ago was the time. If instead of extending Glass-Steagall, a proven winner, to novel entities, the idiots killed it.
7.14.2008 8:41pm