Monday, September 8, 2008

Best of bad options

I normally study IT not GSEs, and thus my posting yesterday was argued from first principles rather than original research.

However, the FT's economics corespondent Martin Wolf has given it far more thought. Here are a few choice quotes:

As a result, US housing finance has been brought under direct government control and, in the process, the gross liabilities of the US government, properly measured, have increased by $5,400bn (€3,800bn, £3,000bn), a sum equal to the entire publicly held debt and 40 per cent of gross domestic product.
Was there an alternative to such measures? I am talking here not of the precise details, but of the broad decision. The answer is No, for two reasons.

First, the institutions were unable to raise the capital they needed to offset the losses on their lending in the collapsing US housing market. ... Second, the liabilities of these enterprises were held widely abroad, particularly by central banks and governments.
Agreeing with yesterday's point — what goes up must goes down — he is very caustic in his conclusions:
What, finally, are the lessons, beyond the obvious one that it is idiotic to believe that the prices of any asset class can only go up? It is that the US unwillingness to recognise that socialised risk demands public control has created not just a scandal, but a gigantic mess.

The US public has ended up with an open-ended guarantee of the liabilities created by supposedly private entities. It is a bad place to be. As Mr Paulson says: “There is a consensus today that these enterprises pose a systemic risk and they cannot continue in their current form.”

Amen to that. At some point, they will have to be broken up and sold off. Given the state of the housing market, that happy day is a long way off.
The one issue that Wolf doesn’t talk about — perhaps because it’s merely a political matter on this side of the pond — is how many hundreds of millions of taxpayer money was transferred to politically connected executives and lobbyists seeking to protect their lavish paychecks. Of course, those hundreds of millions are chump change compared to the mismanagement (if not deliberate fraud) wiping out $70b in shareholder equity and sticking taxpayers with $5 trillion in debt.

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