Friday, July 11, 2008

Insolvency Dominoes

If Fannie and Freddie are at, or near, technical insolvency (combined assets worth less than debt) as ex-Fed member William Poole said yesterday, what are we to think of every other bank in the US?

Those two GSE's alone own or guarantee nearly $6 trillion in mortgages and have another $1.45 trillion of their own bonds outstanding, so ownership of their (nominally AAA) mortgage pools and other securities is definitely widespread amongst the US and global financial institutions. And let's not forget that central banks accept such AAA repo collateral willy-nilly, to finance banks and investment banks.

This being summer (numerous alternatives to writing and reading blogs) I have but a single question:

Can everyone see the dominoes?
Addendum, July 11

The NY Times has a story about the government considering a takeover of the two GSE's in the form of conservatorship. Well worth a read, it clearly spells out the serious problems facing such an undertaking. For example, such a move would not really solve anything because the market already assumes that Fannie and Freddie have the implied backing of the government.

There are no easy solutions here. Time has come to look for the hard ones, and take the bitter medicine as soon as possible. There is no way to sugar coat this pill - it's simply too big, orders of magnitude bigger than Bear Stearns/JP Morgan.

My opinion is to let those two behemoths wind down their business in a controlled fashion and to revert to a mortgage market backed by regular banks. Mortgage issuers would then not be able to pass the paper to Fannie and Freddie and would have to hold on to it themselves.

In my view this would be a blessing and go a long way in
eventually normalizing the real estate and mortgage markets.


  1. " The companies have about $80 billion of regulatory capital supporting $5.2 trillion of mortgages.

    ``Just given the size of the two companies, surely the government would not stand aside'' and let them fail, Yun said."


  2. yep, the dominoes have been being put in place for awhile. hooray for highly leveraged derivatives and deregulation!

    it's all lining up. but in what order? bailout, proper printing of money and hyperinflation? getting grown up, raising rates and deflating (hah!) or just keep ponzi schemeing until post chinese olympics?

    lovely choices indeed.

  3. Tim Iacono over at The Mess That Greenspan Made posted an article about this very subject. He joked that all that was needed to get through our economic woes was a little positivity.

    I'm reminded of Mel Brooks' Robin Hood: Men in Tights. The scene has the Sheriff of Rottingham informing Prince John of bad news. Prince John replies that he hates bad news and maybe if the Sheriff told him the bad news in a good way, it wouldn't be so bad.

    Think positive and happy thoughts. Pink bunnies, fluffy clouds, banks and GSEs with balance sheets in the black, Americans families with more home equity than they know what to do with.

  4. Hell,

    I asked a similar question about this earlier.

    There is a bank that has no limit on debt and the managers are corrupt as hell--no offense--this domino will not fall. Charge the American taxpayer, what's another $10 trillion in debt?

  5. Dink and Marcus: an economic review from the Phil Gramm school of economics. I thought it might help you get thru these excessively negative feelings.

    And Greenie, come to think on it, you might benefit from a review as well ;-)

  6. You think Fannie and Freddie will fail so fast? Even MBI and ABK are still in business. Could you ever imagine in January that these two pieces of $#it will survive so long?

  7. Hey, "no worries" its all good Thai--even genocide.

    Since were sharing ditties, thought you might enjoy this one:

    Not that things could ever get to this point...

  8. H inquires: Can everyone see the dominoes?


    You mean Domino's Pisa?

    Well, nowadays, Pisa is delivered for free whenever you have the appetite. And whether it is Domino's is no longer of much significance.

    My memory of the trip to Tuscany is now a bit vague. Do not quite remember if it is the Church by its side that has the impressive purple Mediterranean marble. Anyway, with that kind of a foundation, that kind of a design, the splendid architecture invites awe.

    It is just that once the center of gravity tilts to a certain point...


  9. "Its alarming how charming I feel"

    Thanks Thai, that really took the edge off :)

    I believe there's a compilation on youtube of all ~270 times the word "f#$&" is used in The Big Lebowski. Perhaps that can help me get through the headline "Rove Ignores Subpoena"

  10. I would not be alarmed by the debt itself, but by the consequences of a default.
    I believe Fannie and Freddie have a whopping share of the MBS market now.
    Take them out and the credit freeze will become the ice age of credit...

  11. "....In my view this would be a blessing and go a long way in eventually normalizing the real estate and mortgage markets...."


    You can't say that you didn't see this coming....

    One of my girlfriends just bought a house in West Palm Beach, FL, very good neighborhood. She paid 198k. The previous sale for this property was in May of 05 at 789k. is this normal....? Granted, the property was in foreclosure and had been on the market for over a year, however, my question is, is this the new "normal".....?

    I think that we're in a deflationary spiral, am i wrong....?

    Best regards,


  12. Greenie, since you like to make fun of my concerns over US solvency, I thought you might find this interesting... This Anglo Saxon is not so sure his peers are quite the stewards his great grandparents were. I wouldn't buy into the notion that Anglo Saxonism will save this country from its current gluttony.

    By the way, Hell, why did you change your subtitle?

  13. I can't see the the Apple Pie, Patriotic FED giving up their money making paper loot to lending institutions, the local banks would then make the billions of interest on the loans rather than ponying them up to Uncle FED and making the moola off servicing the loan. Nope, can't/won't happen. They been counting on the American people to spend and buy BIG so Uncle FED can live the lifestyle AND grant outrageous raises to Congress.
    Who IS watching the baby?? Anyone?

  14. Econolicious...

    ONE of your girlfriends???? *G*


  15. Thai,

    Is this of any help?

    You are not expecting US government to go belly up soon, are you? Even Washington Mutual and Ambac are still standing....and oh, I forgot about GM.

  16. Certainly not any time soon.

    Thanks for the link, I agree it is a very interesting article.

    Do you know what Japan's debt as % of GDP was BEFORE they went into their deflationary spiral?

  17. 54% according to this link:

    Over 100% now.

  18. Thanks! Actually, I think Japan is around 195% now...

    Do you know what the total debt as % of GDP for Japan was in 1990? I couldn't find it on the NationMaster website... thanks for the intro by the way, great site :-)

    I know Hell said on an earlier postings that TOTAL US debt was running around 300% of GDP at the end of 2007.

    Can I use current account balance be used as a 'quick and dirty' indicator of debt financing?

    If so, then according to NationMaster's numbers Japan was running surplus of 1.46% in 1990.

    On the other hand America today needs to borrow a little more than 6% of it's GDP to finance ongoing operations.

    Wouldn't the combo of US public debt at 61% GDP today vs. Japanese public debt at 54% GDP in 1990 plus the economist saying our housing bubble was even larger than Japan's mean we are in slightly worse shape than they were in 1990.

    PLUS total US debt in 2008 at 350% GDP vs (??? lower for Japan in 1990-- I will assume it was lower in 1990)...

    PLUS larger US external financing needs today as % of GDP vs. Japan in 1990...

    PLUS the possibility that much of the rest of the world may go into recession...

    ALL combine to make the situation today in America much worse than it was in Japan's in 1990?

    Wouldn't this make US solvency a legitimate concern?

    I remember asking a while ago if anyone knew at what % GDP nation's tended to default at? I think Argentina defaulted at around 120% (I realize there are LOTS of other differences between the US and Argentina, and obviously Japan's debt is almost 200% today and they still have not defaulted).

    I agree that US solvency issues are unlikely any time soon based on these numbers, but there is cause for concern, especially if one is considering safeharboring assets in US treasuries.

  19. If real estate is such a great investment and "always goes up", then why did we need government subsidised/sponsored agencies to buy this stuff?

    Surely mortgages are a no risk prospect and the free market should be lining up to dole out cash to anyone who wants in on the property ladder?

    Another case of: "the free market is the answer, except when it isn't"?

  20. Hell and other folks,

    This is what I found on peak oil in youtube.

    Any comments?

  21. Good stuff Thai. Don't worry we'll pay all of that debt, maybe with grossly inflated dollars ala Germany 1920's.

    I think a safe bet when predicting the future actions of this administration and Congress is to imagine the most corrupt and craven behavior, designed only to push the problem forward, at grater risk to the system in the long long. It may be deflationary now but not when treasuries hit double digits.

    Debasement of the currency is my bet. There will be no Paul Volker to exact discipline in this era. Therefore my cryptic reference to genocide, desperate populations look for scapegoats.

  22. "Do you know what the total debt as % of GDP for Japan was in 1990? I couldn't find it on the NationMaster website... thanks for the intro by the way, great site :-)"

    Thai, That link I gave you says 54% in 1990.

  23. "Wouldn't this make US solvency a legitimate concern?"


    You are confusing between apples and porcupines. There is not one entity called 'US'. It is a collection of individuals/families, businesses/non-profits, banks, local and state governments, quasi-qovernment agencies and federal government. Some will go bankrupt and some will not. You cannot make a blanket statement saying US will go bankrupt.

    If you are thinking about US government going bankrupt, I would say that it is really too early. I would worry about that issue after at least few states like Michigan, California and Florida say no to their debt payment. Also, some European and emerging countries need to go the way of Argentina.

    Think about it - federal government has all the options that were tried by vulnerable companies before it halts its debt payment. It can renegotiate on social security and medicare, just like GM and Airlines screwed their retirees. It can cut down defense budget.

    Also, taking Fannie/Freddie on its book are not going to make US bankrupt either. Fannie/Freddie are not dead entities. They receive stream of interest income from millions of home-owners. It is serious policy issue, if US government bails them out. However, it is NOT a life or death issue for US government yet.

    So, I would say there are thousands of things to be worried about b4 I get too concerned about US filing for bankruptcy.

  24. Greenie, thanks, and I agree with your view that the US is a collection of seperate entities (separate governement, separate pivate, etc...), each with their own debt problems. But I think you and I still seem to be reading this data differently... It is not so much the different government entities
    that are confusing me, it is getting a handle on all the different debts that are out there in America today and comparing them with all the different debts the Japanese held in 1990.

    But I know this is the only way I can do an 'apples to apples' comparison.

    Greenie said "Thai, That link I gave you says 54% in 1990".

    My reading of your link is that Japan's central government PUBLIC debt was 54% GDP. This is very different than saying Japan's TOTAL debt was 54%. The link does not share what, if any, additional debt the Japanese held above their central governement's debt. But they must have also had local governement debt, household debt, corporate debt, etc...

    What NationMasters does compare (again, if I am reading it correctly) is America's central government debt (I will assume this means Federal debt) against Japan's central governement debt. And it says America's central (i.e. federal) government public debt is 60% today vs. 54% for Japan in 1990.

    Hell posted in February America's public STATE AND LOCAL debt was an additional 15% GDP on top of the already very large 60% federal public debt.

    But in addition to the 15% state and local debt and the 60% federal debt, America also has private household debt, corporate debt, etc...

    It is my understanding from reading Hell's blog that when you add all forms of debt together, America's TOTAL debt is 350% GDP. A number so large it has few peers in all of history.

    I believe the Japansese were-are ultra savers so I would be VERY suprised to learn that their total debt came anywhere near 350% of GDP in 1990 like it does in America today.

    This is what I do: I know Japan has 200% PUBLIC debt today (way up from the 54% they started their deflation with in 1990). And while I don't know Japan's TOTAL debt (in either 1990 or 2008), as I have said, I would be VERY suprised to learn their total debt was anywhere near even 200% GDP in 1990, again where they began their deflation.

    On the other hand, America will start its deflation right off the blocks with a total debt of 350% GDP.

    What's more there are a lot of Keynsians still out there who think the solution to a debt problem is even more debt. I read PIMCO's Bill Gross the other day encourage Obama to become 'fondly' known as "Trillion dollar Obama" (he could just as easily have labeled McCain with that phrase for all the spending and tax cuts McCain has been promising).

    But deflation makes debt more even more expensive tomorrow than it is today. In fact, I am guessing (but don't really know) one of the reasons Japan's public debt increased so much over the last 18 years (again from 54% to 200% GDP) was because of their deflation, which made debt servicing so much harder politically.

    What would happen to America's 350% number were we to enter a period of sigificant deflation? Further what would happen were we to increase this number further with even more deficit spending significantly in hope of spending our way out of this debt problem? Again, all when our starting point is 350%?

    Am I looking at this all wrong?

    Do you see now why I remain a dog with a bome on this issue (or at least where I am looking at things incorrectly)?

  25. Thai,

    You probably saw this chart before. I have seen it in one form or another for the last four years.

    We went through high (total debt)/GDP period in 1930s. Over time, debt came down and GDP grew.

    So, USA will go through another similar period. Private debt will come down. Corporate debt will come down. Government debt will go up to 150 or even 200%.

    But of course you realize that it is not that simple. There will be financial crisis (already started). There will be social crisis and widespread poverty. There will be political turmoil and wars around the world. There will be widespread anti-semitism. Eventually normality will return.

    Nothing says here that US government is gonna go bankrupt. The most I see is that dollar will not be considered reserve currency around the world, which is a big thing as a superpower....but bankruptcy? Not there yet. Maybe you should focus on UK instead.

  26. Maybe the regulator can purchase an EASY button from staples. This problem is a blessing in will cause a major humbling of our foreign policy in both the immediate and long-term future. I can recall when I was a kid the fear of the great Japan before their "problem". Most people I talk to want the reset to occur's the super wealthy that are freaking out!

  27. Marcus-- while I am not quite as cynical (yet) on our leadership as you are (I tend to blame voters more than I blame those they elect), I have to respect your view as one real possible future.

    As for Volker, IMHO men like him are rare to begin with and are even rarer amongst decision makers (genuine independence does not seem to be a virtue with most voters).

  28. Hell, I have a question: do you know what the apples to apples comparison of America's TOTAL debt circa 1930 is with America circa 2008?

    Greenie, true, it did come down, but I am under the (perhaps false?) assumption that-
    1. Total debt still started at a much lower levels in 1930 than it is today
    2. It was pretty ugly for a while.
    3. TREMENDOUS improvements in productivity still occured throughout the 1930's with aviation, automobiles, roads, telecommunications and energy delivery systems.
    4. Similar productivity growth rates are not occuring today (at least in the developed world).

    Greenie said... "Think about it - federal government has all the options that were tried by vulnerable companies before it halts its debt payment. It can renegotiate on social security and medicare, just like GM and Airlines screwed their retirees. It can cut down defense budget"

    I see your point, but I think it kind of ignores the zero sum nature of the problem from a government's viewpoint (whereas it is most decidely not 'zero sum' from the viewpoint of a corporation). For once a government becomes a very large % of the economy (US government spending in all its forms-- Federal, State and Local-- represents something like 1/2 the US economy), government cutbacks impact the entire economy and its own coresponding tax receipts in a way corporate cutbacks do not impact the indivudal corporation's revenues (and I am not implying I agree with Republican Laffer arguments, which often seem spurious at best).

    To make my point-- If GM reduces pension benefits, the overall financial 'hit' to their customers (of whom only a small % are actual GM employees) is much smaller than the overall financial 'hit' to GM's employees. Car sales might drop a little as GM emloyees buy less cars, but the other customers are still financially 'OK' and therefore GM's sales would not drop nearly as much as its expenses. Cutting retirement benefits is therefore quite profitable to GM.

    But when the government is 50% of the economy and it reduces it's expenses by cutting back on healthcare and retirement obligations, etc... the government is in effect cutting back on its own 'customers' in a way GM is not and cutting back on expenses might not improve solvency in the same way it would for (say) GM.

    In the long term, moving so much economic activity from public to private hands might improve national productivity growth, in the long run improving corresponding revenues (really depends on what is cut-- cutting back on chemotherapy for people with severe dementia and cancer in nursing homes might improve national productivity, while cutting back on basic science research to improve treatments for low back pain in young healthy workers might not). At any rate it is likely the benefits of this would take some time to materialize.

    Then again, as I think on it, there is a fractal argument to be made that it is actually exactly like GM: if government tax revenues come from people unequally (Pareto distribution?), but government distibution of expenditures is more 'egalitarian', then perhaps it would work for governement just like it would for GM.

    I will need to think on this a little...

  29. Greenie, I finally got your link to work. It seems fairly alarming to me IF it is accurate. If it is, you answered the question I asked hell.

    Do you have a link to anything similar looking at Japan's total debt circa 1990?

  30. In the 1930's debt/GDP shot up because GDP plunged, not because debt soared.

    Today's debt situation is far, far worse and encompasses the entire American society. Debt liquidation is the only way out, before the "real" economy (whatever is left of it, anyway) gets dragged down and drowns.

  31. Folks, we have, over the last year or so, crossed the great divide between the land of "to big to fail" to "to big to bail" where the only collateral worth mentioning anymore is the collateral damage that occurs when ultra- large institutions can not be rescued in the time honored way or, for that matter, any other way.

    For those of you inclined to do so, I strongly suggest that you stop waiting in Godot like fashion for Weimar like hyper-inflation to emerge and... do what? It's not going to happen. Repeat after me, liquidation, liquidation, liquidation.

    As for dominoes falling, (back to collateral damage) ponder the effects that will manifest far beyond just the financial and general economic realm.

    Apropos of the criminal Karl Rove's defiance of Congress, (and the shockingly limp wristed response by Congress- by law Mr. Rove should be apprehended and arrested tout suite) I urge everyone to pick up a copy of the latest Harper's and read the story entitled, "The Wrecking Crew." We are, in large part, where we are as a result of that which is discussed and analyzed in that worthwhile article.

  32. jan:

    "ONE of your girlfriends???? *G*"

    To be politically correct, one of my female friends.... Sorry, I call all of my female friends girlfriends in an affectionate sort of way, they happen to call their female friends girlfriends as well... I hope that I didn't offend.

    On the other hand if you thought that I was trying to pass myself off as a Casanova, I can assure you that I do not resemble him by any stretch of the imagination, life is complicated enough as it is, thank you...


  33. Edwardo said... "As for dominoes falling, (back to collateral damage) ponder the effects that will manifest far beyond just the financial and general economic realm"

    Care to make any predictions?

    I am betting we will see ‘socialized medicine’ before all this is over.

    As for financial dominos outside the financial system (not really your question I know but also interesting to ponder) —
    From Alice Cook’s Blog UK Bubble

    “IndyMac had around 10,000 depositors had funds in excess of the insured limit $100,000. Depositor losses could exceed $1 billion”.

    Were such events to happen to my firm's cash management account, the effect would be disastrous.

    America's small businesses, watch out!

    Regarding ‘The Wrecking Crew’, I don’t get Harper’s but looked up some excerpts, from what I read it seems like an awfully partisan reflection of the last 28 years). If Greenie’s debt/GDP chart is to believed, this problem has been building for a very long time and has everyone’s fingerprints on it.

    I just don’t buy the arguement that either ‘consistent regulation’ or ‘pure free market discipline’ or any combination of these two will ever save us from wild ups and downs.

    One thing I deal with literally every day in my line of work is a almost fantastical illusion most people maintain that they are both invulnerable and immortal (youth are obviously the worst).

    Our problem seems to stem from a false belief that we can ever ‘tame’ things as wild and unpredictable as our economic security.
    Yet if complexity science teaches us anything, it is that risk and uncertainty are infinitely scalable—bigger NEVER means safer-- only the timescales change. (there may be evolutionary reasons reasons our mind does this-- awareness of one's own mortality can be very paralyzing and as they say "you got to move on").

    Meaningful things in life (trust, love, health, etc…) are vastly riskier than most of us care to believe-- Black Swan’s are inevitable.

  34. Thai,
    I think I remember seeing a graph showing debt/GDP peaking at 270% in the first half of the 30's and was about half that in the late 20's but it's a weak memory I'm not sure of.

  35. Sorry Thai,
    I just clicked on your link and it seems to be the same graph, I should have read further down before posting.

  36. Let's look at the topic and then talk about the probable response and the possible effects:

    Hell said:
    "There are no easy solutions here. Time has come to look for the hard ones, and take the bitter medicine as soon as possible. There is no way to sugar coat this pill - it's simply too big, orders of magnitude bigger than Bear Stearns/JP Morgan."

    The easy "solution" will be taken. Prop it up , zombify it, push it down the road, that is the probable response. To think otherwise is placing virtue ahead of political advantage--not in this era.

    "Orders of magnitude" has no meaning to the voting public. Originally told the Iraq war would cost 10-15 billion dollars the plus one trillion dollar reality has no real psychological kick to the public--just add a few zeros. The national debt increasing four trillion dollars the last eight years has similar kick in the minds of the voting public--none.

    One positive aspect about Obama winning the presidency--besides Constitutional integrity (we can only hope)--will be the newly found fiscal responsibility by the republicans, hoping to turn it to political advantage against the democrats, pushing the country toward recession/depression.

    I agree with Greenie to the degree that after "the bitter pill" is taken during the Obama term we can expect a lashing out by the next war hawk, and a Semite group is at risk of genocide.

    If McCain is elected the war will begin a lot sooner, Justice Brennan will keel over from heartbreak and martial law will follow.

  37. Marcus, reasonable enough...

    I am guessing Brad DeLong's playbook is going to be the one that is actually followed (and not Grover Norquist). It seems so 'reasonable'.

  38. I'm sure many of you in long-time marriages have learned how to argue efficiently. Here's a snippet of conserversation at a local restaurant tonight:

    <1/2 (better half): "You look lost in thought"
    Me: "Yurts" (Summation of previous arguments that civilation is ending and survivors will need to live in yurts farming with goats)
    <1/2: "Dollar cost averaging" (You are overreacting; everything is going to be fine)
    Me: "Hmmmm" (I disagree, but recognize my inability to convince you)
    <1/2: "The salsa is good" (Salsa is objectively good & non-sequitor needed to change topic)
    Me: "Yep!" (Enthusiastically agreeing to salsa quality and topic changing).

  39. Thai, I suggest reading the article in full and not just a few small excerpts before asserting what you think comprise the article's failings. To wit: The Wrecking Crew isn't about the last 28 years, though the Reagan Revolution, as it was called, certainly gave birth to the Republican Congressional demon seed that is the article's primary focus.

    As for partisan, if the shoe fits, then best to bloody well wear it. There is no point in looking in every room of the house for the missing article of clothing when all the evidence points to it being in the master bedroom. The fact is, however feckless and lame the Democrats may be, Republicans (as per the thesis of the "The Wrecking Crew) were the primary legislative architects, enablers, and ombudsman of our present misery. They held the congressional reins of power from 1994 until recently, and during that time they did their worst.
    Now we are paying the price.

    I know you are fond of applying equal responsibility for all manner of ills to the powerless as to the powerful, but I'm afraid that everyone doesn't have their fingers on deleterious long term trends in debt to GDP ratios. I, for one, don't, and it is highly doubtful, in fact it's provable, that while some have left small smudges on the canvas others have badly stained the surface beyond all recognition, and others still have punched holes right the way through. All this by way of saying we are not all equally culpable in our national catastrophe.

    Now as for my prognostications, socialized medicine? Perhaps. That sounds like a relatively happy outcome. I see institutions in all areas of civic life, from hospitals, to banking outfits, to government, local and federal, seizing up and failing to function.

    Why it's already happening. And sometime in this generation or the next, some part or parts of the nation will explore, though that may be far too polite a term, obtaining independence from the rest.

  40. Edwardo said...

    "in fact it's provable, that while some have left small smudges on the canvas others have badly stained the surface beyond all recognition, and others still have punched holes right the way through. All this by way of saying we are not all equally culpable in our national catastrophe"

    Perhaps you have been misunderstanding me... such a comment could have been torn from ANY text of my fractal universe.

  41. Perhaps you have been misunderstanding me... such a comment could have been torn from ANY text of my fractal universe.

    Maybe, Thai, but my recollection of your perspective about who was responsible for the fall of Enron doesn't exactly square with that.

  42. Sometimes it seems that Thai believes that voters have psychic abilities and can tell when candidates are lying to them and so must be held responsible for voting in liars.

    Obama railed against the invasion of Iraq and anti-war voters voted for him; are they to blame that now he has back peddled?

  43. Edwardo- they are not inconsistent, but I will spare you and everyone else a clarification.

    Yoyomo- not psychic. But I do think voters themselves 'corrupt' issues by doing things like voting for a politician on one (or a small cluster) of issues without considering still other issues.

    Large numbers of voters decide whom they will vote for based solely on one issue (say abortion, Iraq, whatever...).

  44. Thai,
    That has to be one of the silliest arguments I've heard. Anti-war voters corrupted their opposition to the war by not considering tax policy?

  45. Yoyomo-- If it is the 'anti-war' notion that is getting in the way of you understanding my point, then strike that particular issue from the list. It is an example only. I am not trying to pick on any one issue.

    It is not a silly argument at all, regardless of what you think. I'll try one last example to hel pyuo see my point and then we can just move on...

    EVERYONE in New Orleans knew about the levees for as long as I can remember (and I mean EVERYONE). FEMA would run training excercises with the local agencies for just the scenario that eventually occured (again for years).

    All the state voters knew about the Levee issue, but doing something about it (i.e. spending money on Levees and NOT spending money somewhere else) was too difficult a choice for them to make, so instead they elected politicians who did not solve the problem, even though everyone knew the issue was real. To steal a term from Randy Shilts: 'the band played on'.

    Everyone may agree on an issue, but when it comes to making the tough choices necessary to solve the issue, the issue can still lose priority as others are believed as being 'more important'or 'more pressing'... pretty soon 'it just doesn't happen'.

  46. > the market already assumes
    > that Fannie and Freddie have
    > the implied backing of the
    > government...

    If that's true then why did 30-year fixed mortgage rates decline as soon as the takeover was made official?

  47. > revert to a mortgage market
    > backed by regular banks

    Agreed! If the banks hold onto the mortgages they originate, they'll give a damn about them. They be careful with their lending, which is good for both borrowers and lenders. IMHO, the subprime mess would have had a fraction of the impact it's having now if Fannie and Freddie never existed. Yup.

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