It’s just a little bit of Policy Fail Repeating

bad-bank-2When you let lobbyists make public policy, failure is an acceptable outcome. That’s because the point of the policy isn’t the public and isn’t necessarily doing what will work. The point of the policy is to enrich and perpetuate the entrenched interests. Every other possible goal becomes expendable including those that have to do with protecting the public purse and welfare.

Imagine my lack of surprise when I saw that the creation of a “bad bank” policy is back in today’s WaPo headlines. Go take a look at “U.S. Considers Remaking Mortgage Giants:’Bad Bank’ Would Wipe the Slate Clean for Fannie Mae, Freddie Mac by Taking Their Toxic Loans” and weep. This administration will reward bad players as long as there is a political reason for them to exist. So, instead of real reform of Fannie and Freddie, they’re proposing a solution that sweeps past mistakes under the rug and allows these failed institutions to operate in the same irresponsible way that brought them their current fate. There is no such thing as the discipline of the market or the bankruptcy court when you’re big enough to hire K Street impresarios to keep your show running and the federal government enables you.

The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in troubled loans and create a new structure to support the home-loan market, government officials said.

The bad debts the firms own would be placed in new government-backed financial institutions — so-called bad banks — that would take responsibility for collecting as much of the outstanding balance as possible. What would be left would be two healthy financial companies with a clean slate.

The moves would represent one of the most dramatic reorderings of the badly shattered housing finance system since District-based Fannie Mae was created by Congress to support mortgage lending during the Great Depression. Both Fannie Mae and Freddie Mac, based in McLean, have government charters to buy home loans from banks, which they then repackage and sell to investors. The banks can then use the proceeds to offer more loans to home buyers.

The leviathans became emblematic of the financial crisis when they were effectively nationalized in September amid a market meltdown that revealed much of their holdings to be troubled. The government has since pledged more than $1.5 trillion, including $85 billion in direct aid, to keep the mortgage market working through Fannie Mae and Freddie Mac.

The proposal, which is preliminary and one of several under discussion, is scheduled to be taken up by the White House’s National Economic Council on Thursday.

What about the Japanese lost decade and all the papers and studies written about the bad bank policy did these folks miss? Well, of course, you do know that the head of the “White House’s National Economic Council ” is La-La Summers, right? Mister, I got mine from Wall Street? Let’s look at the other players who buy into this. I’ll just highlight them so you can see that it’s basically the same players that had some kind of supporting role in the original failure. Why does Washington D.C. continue to reward the very same people and players? It has too be some thing pathological.

The government’s efforts so far “have taken the risk out of those two firms,” Treasury Secretary Timothy F. Geithner said in a recent interview. “The only question that remains is what form, what structure they ultimately will take.”

In an interview Wednesday announcing that he would step down later this month, James B. Lockhart III, the chief regulator of Fannie Mae and Freddie Mac, said there needs to be a “good bank, bad bank” structure.

The “bad bank” would be a depository for Fannie Mae’s and Freddie Mac’s toxic assets. Then, the government could create new companies, if it chose to do so, that would attract private investment in support of mortgage finance.

Options for the “good banks” include consolidating the firms into one government agency, leaving mortgage finance to private banks or maintaining a hybrid model.

The National Economic Council has looked at the “bad bank” option, among many others, in several internal policy papers. Any final decision would come after talks involving the White House, the Treasury, the Department of Housing and Urban Development and the Federal Housing Finance Agency.

Okay, there is one paragraph, buried in the article that basically lays things on the line. This is why we continue to pour billions of dollars into a failed structure. I’m highlighting (in angry red) what is driving this stupid policy. Who do you suppose the firms are that “own and insure trillions of dollars of existing mortgages”?

Oh, please, we’ve discussed this enough that I think you can think of several right off the top of your head. There’s that subsidizing investors who make bad decisions again. People without health insurance can just go ahead and die and lose all their assets, but let’s not let one big investor get left behind. Like say, those banks who buy Fannie and Freddie because of the implicit guarantee that they’re not as risky as they are because the government will bail out their politically appointed CEOs and their economically and politically bad decision-making .

A major problem is that the firms own and insure trillions of dollars of existing mortgages. With the economy still in a deep recession, joblessness rising and defaults on home loans expected to continue to go up, there is great uncertainty over the size of future losses at Fannie Mae and Freddie Mac. That, in turn, is likely to drive investors from committing money to the companies.

Then there is this gem from USA Today that will make the National Realtor Association (lobby extraordinaire) along with other advocates of home ownership see red. If this isn’t the impetus for more loosy goosy lending standards and NINJA loans, I don’t know what is. We’ve not approached the systemic problems at all. There is no translucence in the derivatives market yet, no increased oversight in the origination process, and there’s an entire bunch of people that would just like to see the housing market turn around again. Is this a recipe for a repeat disaster or what? We’ve not changed any of the regulation, we’re bailing out the players, and meanwhile the bias towards homeownership in our laws continues, all nicely pushed by a ton of special interest groups.

The rate of homeownership is forecast to keep tumbling in the next decade to lows not seen since the 1980s, a trend that could redefine a key element of the American dream even after the housing market recovers.

The percentage of households that own homes hit a peak of almost 70% in 2004 and 2005. By the second quarter of this year, that slipped to 67.4%, according to the Census Bureau. Now, a University of Utah analysis projects it’ll drop to about 63.5% by 2020 — the lowest since 1985.

“It will fall steadily by about half a point per year,” says Arthur C. Nelson, director of the university’s Metropolitan Research Center. “We’ll have far more renters in the future.”

Homeownership has long been viewed a key to building stable communities and middle-class families. Federal policy encouraged it with tax credits and government-backed mortgages. Now, demographic changes, strict mortgage rules, energy-saving policies and lessons learned in this housing crisis are driving more people to rent.

About 57% of the 30.3 million housing units added from 2005 to 2020 will be rentals, Nelson says.

“So many of our federal and state and local policies are driven by the assumption that homownership is inherently preferred over renting,” he says.

While I still know what’s at stake in the realm of the economy, I’m seeing things like this in the realm of politics where unfortunately economic decisions and policy are made. The Hill’s Blog Briefing Room reports this tidbit from Iowa’s Senator Grassley. (Okay, he’s a Republican so, I’m making that PC error of not regurgitating the news for you again.)

President Obama is too inexperienced in national politics to really understand the legislative process, Sen. Chuck Grassley (R-Iowa) said Wednesday.

Grassley, who as a lead negotiator of the bipartisan healthcare reform deal the president supports has dealt often with Obama, said that while he likes the president personally, Obama effectively only had two years of experience in national politics.

“I think that he is a good person, and good-intentioned,” Grassley, the ranking member of the Senate Finance Committee, said in a radio interview. “But I believe he didn’t serve in government long enough to understand really how things work.”

“Remember, he was in the Senate four years, but effectively only two years because he spent two years where he was hardly ever here at all — he was campaigning for president,” Grassley said. “He really does not have an understanding of how Congress operates.”

Then there’s this from CNN.

As President Obama approaches 200 days in the White House, a new national poll shows his approval rating has dropped seven points since the 100-day mark in April.

If we were going to get anything other than enhanced status quo, it should’ve happened by now. I have see nothing but policy chaos that’s giving tactical advantages to lobbyists who know how to use them when they get them. The press appears focused on birther conspiracies and public meetings where honest citizens with honest questions are being disrupted by red meanie Republicans and green seeking industry plants. The Democratic leadership and the administration appear at sea to deal with anything but orchestrated Obama love-ins. They seem completely unprepared to handle the situation. I’m waiting to see how long Rahm and Axelrod will be able to orchestrate the rock tours before the reality of the chaos leaks on to the stage. Who will play the role of the Hell’s Angels then?

It’s still about the economy and the jobs. It’s about re-creating financial markets so they function free of the monopoly behaviour that drove this last financial crisis. We need the government in there as an honest broker of interests. We need them to not pick teams but act like a referee. Maybe it’s because the press is also so dysfunctional that I’m not seeing any real change. If all we get is enhanced status quo, we’ll fall right back into the problems we had last year and it will be much harder to correct them this time. The administration needs to stop this ADD policy behavior which encourages lobbyists to step in to fill the void of change when public attention has moved to the next vortex of chaos.

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