Editorial Note: Jon focuses in on a new book by a New York university professor, Matthew Richardson, pointing out that profits are privatized while loses are socialized. In other words they were able to get the government (the people) to back the idea of starting private lending institutions that were handing out loans to provide greater liquidity in the banking market to help more people get into home ownership by making housing more affordable to Americans.
This of course sounded like a very good idea. Just one problem, it was not strongly valued based. The securitization of the loans was betting on market growth and stability. One might say overconfidence without collateral.
A more value based system would rely on stronger assets and capacity to pay. This mechanism has been repeated throughout our recent history in other derivative markets, producing similar results. That being market instability through over-reliance on non value based collateral.
- Fannie Mae was started in 1938 as part of the New Deal to help get America out of the great depression.
- Freddie Mac was started in 1970 to expand the secondary mortgage market.
These secondary derivative mortgage backed security systems are federally backed. So they provide money through investment in the secondary mortgage market. This is a major component of structural weakness that caused our recent bubble to pop, real estate securities backed by toxic debt. That is debt that is not properly securitized. Therefore, when the market goes south, the taxpayers get to pay for the irresponsibility and wishful thinking of others.
It is clear that a principle of earning needs to be applied here, that of objective value rather than fantasy scenarios. America needs to stop buying into the notion that just because papers are sighed and we are told it's legit, that it isn't really legit. Just because somethign is legal, does not make is legitimate. The reality it's not. Pretending that it will be okay is not the way business should be done. Here's are relevant definitions from Merriam Webster:
- : being exactly as purposed : neither spurious nor false <a legitimate grievance> <a legitimate practitioner>
- a : accordant with law or with established legal forms and requirements <a legitimate government>
- b : ruling by or based on the strict principle of hereditary right <a legitimate king>
- : conforming to recognized principles or accepted rules and standards <a legitimate advertising expenditure> <a legitimate inference>
As you can see, just because something is legitimate in the law, does not necessarily mean that it is reasonable, or even smart. We can change the rules and make things legitimate and still damage our economy when that legitimacy is not objectively value based, thus creating a quagmire of toxicity in the market system. So don't trust legitimate any further than it can through you.
- Wind down Fannie Mae and Freddie Mac
- Ween mortgage finance off of the government
- Mortgage finance needs to be properly regulated.