Do not think about, write about or deal with human behavior without determining the effects of incentives.
If you’re stuck in a hole, the best thing to do first is to stop digging. Of course, if someone else is in the hole, the digging can continue because you’re not getting deeper.
from a column in The National Post, May 12, 2010: Nightmare on Main Street
“Certainly, no country is outside the range of the current contagion, but if Mr. Flaherty had wanted to use a more up-to-date — and perhaps relevant — cultural reference, he might have chosen the remake of A Nightmare on Elm Street. That’s because danger to Canada comes not merely, or even primarily, from the prospective disintegration of the European Union, but from the related crisis to our south. Symbolic of that mess — and its government origins — is a monster called “Freddie” (different spelling, same nightmare slasher principle), which, along with its twin sister “Fannie,” is threatening to further shred U.S. public finances.
Fannie Mae and Freddie Mac are the giant “governmentsponsored” mortgage finance entities that were at the heart of the subprime crisis. These lumbering behemoths were charged with spreading the dream of home ownership at the expense of financial prudence. Together, they hold some US$5.5-trillion in mortgages and loan guarantees.”
Government sponsored enterprises, with attendant lack of responsibility, are a recipe for meltdown. This is not a prediction because it’s already happened.
“The U.S. government was forced, in the wake of the 2008 crisis, to take them both into “conservatorship,” a term which sounds solid and reassuring, but which conceals the fact that they are still being used to make, buy and swallow dumb loans, although now in the name of “stabilizing” the market, “aiding liquidity” and “averting foreclosure.” Which is to say, both hiding and expanding policy culpability.
Freddie Mac last week recorded a whopping first-quarter loss of US$6.7-billion and said it would need another US$10.6-billion to stay afloat. This week, Fannie Mae announced an even more horrendous quarterly shortfall of US$11.5-billion, but claimed it would need “only” another US$8.4-billion in government aid.
This comes on top of the US$130-billion or so that the toobig-to-fail zombies have received from Washington so far.
According to industry figures, the Federal Housing Administration, which is responsible for Fannie and Freddie, and its charges were responsible for a stunning 96.5% of new home mortgages in the first quarter. Meanwhile it seems that private financial institutions may still — with full government cooperation — be unloading crap onto Fannie and Freddie at inflated prices. This is a classic example of socializing risk via “backdoor bailouts” of banks at the expense of the taxpayer and the economy. And its trading partners.
What is equally scary, and typical of the political chicanery and/or denial that pervades the political response to the global crisis, is that the U.S. Senate financial reform bill makes hardly any reference to Fannie and Freddie. Their results were simply ignored by the Obama administration, but, as The Wall Street Journal noted last week, “Reforming the financial system without fixing Fannie and Freddie is like declaring a war on terror and ignoring al-Qaeda.”
…….It has become increasingly obvious that the attempt by governments around the world to cure the financial disaster of their making with more of the same is doomed to failure. The great Ponzi scheme of the redistributionist and regulatory state is unravelling. The difference with a conventional Ponzi scheme, however, is that the private-sector version simply collapses. With the government variety, contributions are not voluntary, and there is no escape. Not only are the suckers told that their promised returns have to be slashed, as in, for example, pensions kicking in later; they are also told that they have to pay more for what they won’t get. And the price does not end there. The taxation required to keep Ponzocracy afloat perpetually threatens to sink the private sector. They certainly sap its wealth-creating ability.
The wrong economic theory, lack of responsibility and the hubris that comes with backing your “investments” with coercion all produce what you now see, a landscape becoming more dismal. Social justice will collapse because of the continuing search for social justice.
Cheerio and ttfn,
Grant Coulson
Cui Bono–Cherchez les Contingencies
May 22, 2010 at 3:03 pm |
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