Tuesday, July 15, 2008

Daniel Gross is an idiot

I don't know why I even bother reading his pieces any more, as each one infuriates me with something even stupider than the last. Are good economics/finance writers so hard to find that Slate can't do better than Daniel Gross? His latest, on why bailing out Freddie and Fannie are a good idea:
But as it turns out, under almost any circumstances, the bailout will be a bargain for American taxpayers, because any cost of it will be overwhelmingly offset by the tangible and quantifiable economic benefits that taxpayers have collectively received over the years from the market's expectations that such a bailout would materialize if needed.
And what are these benefits?
"[M]ortgage rates are 25 – 50 basis points lower because Fannie Mae and Freddie Mac exist in the form and size they do." (Twenty-five to 50 basis points is one-quarter to one-half a point, in layman's terms.) Freddie goes on to say that "because the secondary mortgage market saves homebuyers up to one half percent on their mortgage, borrowers nationwide save an average of nearly $23.5 billion annually." That may be overstating the case. Economist Lawrence J. White of New York University's Stern School of Business says the consensus among economists holds that the implied guarantee allows Fannie and Freddie to borrow at rates between 35 and 40 basis points lower than rates available to analogous companies that don't have an implicit government backing. If Bank X pays 5.35 percent to borrow, Fannie Mae pays only 5. The government-sponsored enterprises pass on most—but not all—of those savings to consumers in the form of lower interest rates on mortgages.
But those lower interest rates simply drive up home prices to the point where it no longer helps borrowers. The last 8 years was defined by ever lower interest rates and borrowing requirements, and ever higher home prices. One truly needs the Devil's Dictionary to define a "liar loan" as an "affordability product" in a world where home prices have gone from 3x income to 9x income.

But, the GSE's ability to borrow cheap and lend high has benefitted someone: its shareholders, bondholders, and executives. The tax payer footing the bill for all of this, not so much.

There is a good reason for the government nationalizing the GSEs, it would be honest and formalize a relationship that is currently, ruinously, informal. If off-balance sheet accounting is illegal for Enron, it ought to be for the US government as well.


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