Under Administration

Normally when a company becomes insolvent an administator is appointed by the courts (or in some instances voluntarily by the directors). Rather than manage the company according to shareholder interests (as a board of directors is meant to) the administrator is there to manage it in such a way as to protect the interests of creditors.

If  Fannie Mae and Freddie Mac had not been taken over by the US federal government then after the dust settled they may instead have ended up being under administration. Perhaps we can consider the US federal government as simply being a different sort of administrator. Yet reading the following article leaves me wonders whether governments make good administrators:-

http://www.bloomberg.com/apps/news?pid=20601087&sid=aDjJYMSphyM0&refer=home

Oct. 11 (Bloomberg) — Federal regulators directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month of underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders last week that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities, according to the people, who asked not to be identified because the plans are confidential. The purchases would be separate from the U.S. Treasury’s $700 billion Troubled Asset Relief Program.

If this is true then Fannie and Freddie are essentially being made to swallow toxic financial waste. Is this how you cure a financial entity that has swallowed too much toxic financial waste?

24 thoughts on “Under Administration

  1. You cannot tell the banks from the government any more. The stealing spree is just incredible. The Bankers will bankrupt main street if main street doesn’t bankrupt the bankers first.

  2. Clearly the wonderful markets aren’t going to cure themselves and clearly putting Fannie Mae and Freddie Mac back in government control partly unwound the deregulation of the past 20 years, regulation brought in when the market had it’s last funk.

    It all a cycle, when it all goes pair shape re-regulation occurs, then slowly the structure is dismantled as the lessons are forgotten and the snake salesman voice gets louder. It’s not the time to be a snake salesman.

    If you want a framework to hang it on, humanity is more than the individual. If you don’t like government find another model that can create structures that can limit the damage created by humanities herd mentality.

  3. The markets are curing themselves. They are reallocating resources away from entities that have made unwise decisions to those that do have the wherewithal to manage those resources responsibly.

    Confidence is rebuilt by millions of individual trustworthy transactions between individuals not by government interventions and guarantees. People keep looking at these mortgage and debt markets as though they are big pools of identical items. The current issue is that theye are like a giant pile of canned goods with no labels (untrustworthy labels) so you don’t know until a long time after purchase whether you got dog food or tinned peaches.

    My greatest fear currently is the attitude of people who make grand pronouncements of humanities or societies needs ahead of individual rights. Crisis periods always offer the easiest path to power for fascists/socialists (same effect different rhetoric) with a quick fix.

  4. If you don’t like government find another model that can create structures that can limit the damage created by humanities herd mentality.

    Charles, the problem is government becomes a herd mentality. Politicians need to buy votes, so they give people money or regulate to the target demographic’s interest. Much like the chief of a tribe who needs to keep power – he’s happy to sacrifice the interests of some members of the tribe to maintain majority support. So, for someone who believes in liberal democracy, the problem with government is that if it is left unchecked it returns to the herd mentality where we simply use government to take other people’s money, impose limitations on other people, and enfornce our views on other people. Then we wind up with a tribal or herd mentality again, which is precisely what we established the liberal democracy to overcome.

    The structure to overcome this and transition from the tribe to civil society is very simple: life, liberty, property. It works in everything from social policy to financial markets. Your philosophy will condemn a society to achieving less wealth and happiness than they could achieve. Now that’s immoral.

  5. charles – please show me the recession that happened in 1988 and the subsequent regulations that were passed then repealed.

    I believe you are simply making this up.

  6. If you were real Australian libertarians you would realise the problems and imbalances in the US and Australian economy are due to over consumption of meat and destructive European farming practices in both continents.
    Without a healthy environment and people there can be no healthy economy.

  7. Mich

    I actually agree with you, too much power in the hands of too few is going to be a problem. It looks as if the US treasury is going to recapitalize the banks, but with non voting equity. On the one hand, where is the justice in that, equity holders should have a vote, but on the other, who do you give the vote to when the equity is provided by society.

    I think you have to give a tick to the US solution over the English solution. I believe the English government is pretty much going to take control. That puts the government in control of the allocation of resources, not a good thing ( in my view).

    Mark
    Most of the regulations were implemented to bring the great depression to an end. It is unfortunate, but we will never know if that was enough, perhaps the war was needed.

    Re 1988, the US bailed out the savings and loans crises pretty much as they will bail out the current mess and pretty much for the same reason. Democracy will not tolerate the destruction of society for the sake of idealogical experiments no matter how much the proponents believe they have the only true solution. That is the strength of democracy and the reason why I subscribe to the view capitalism needs democracy, democracy knocks off the hard edges.

    The savings and loans crises came about for many reasons, for de-regulations contribution to that mess study the Garn-St. Germain Depository Institutions Act of 1982.

    I would add the cost of the Vietnam War to the reasons for the 1988 crash and the Iraq war costs for the 2008 crash. I would also note that an additional tax was created to pay for the Vietnam war, they faced up to the problem. In this election you have McCain talking about continuing the spending and continuing the tax cuts. Pretty dumb when you think about it, a war with tax cuts.

    As a true libertarian based government couldn’t fund a war, that has to be a tick to the libertarian view.

  8. Mick

    On the other topic, western society has the highest standard of living in recorded history, this was not achieved using Libertarian social structures. As I have pointed out before, several tightly regulated societies have standards of living higher than ours, this makes you comment

    “Your philosophy will condemn a society to achieving less wealth and happiness than they could achieve. Now that’s immoral.”

    pretty empty.

  9. Charles, that’s true. In the post-Enlightenment Western world we’ve generally had some mix of classical liberalist principles and socialist principles. And at the times and places we were predominantly classical liberalist the rate of wealth creation, human progress and quality of life was higher. And at the times and places we were more socialist those things were lower.

    Do you consider France to have a high quality of life, say higher than Australia? Do you think the Scandinavian countries will be able to continue with their high standard of living if they remain soft-socialist? I lthink of the USSR as the best a socialist country can be in the long run. I mean government programs did produce a space program, ICBMs and a fair bit of art and science. But it was still effectively a third-world country.

  10. charles – you’re still way out there, but we still love you. I appreciate your concerns but when examined with scrutiny, your claims are not robust.

    Roosevelt’s regulations prolonged the great depression by 7 years. Read about it here:

    http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx?RelNum=5409

    Besides, saying that a war can be good for the economy is simply nuts. You have to retool for a committed period to destroying your enemy. How exactly does war production increase your standard of living? Obsolete aircraft at the end of a war have no use.

    Blaming the 1982 Act is crazy charles. Many of the State chartered thrifts were corrupt (accounting for up to 20% of failures). Also, are you trying to tell me that allowing 10% of funds to be invested in commercial real estate will cause a bank to collapse?

    What you are inferring charles is that allowing diversification is more risky than not allowing it.

    There are two related, but differently valid arguments related to this. Firstly, there is the argument that competition lead to bank failures since it encouraged irresponsible behaviour. Australia has one of the most competitive banking sectors around the world and the most prudent banks. This doesn’t seem to be a very strong explanation, charles. Secondly, is the idea that new technology made the S&L concept redundant. On a technical level, redundancy of old technology is good. But this explanation doesn’t go very far. Why didn’t S&Ls gain cost competitiveness? Why weren’t they takeover targets by banks if larger banks and financial institutions could take advantage of the new technologies? (An interesting question is if that was true, then perhaps the Glass-Stegall Act may have contributed to the lack of saleability of S&Ls and their balance sheets).

    If there is imprudent lending, it usually arises from moral hazard, not actually being able to lend or invest. Furthermore, riskier commercial real estate back then was issued as debt in bonds, not loans.

    When the crisis started in the mid 1980s, insolvent S&Ls were kept open as Congress changed the rules – just like now how we are seeing Congress bail out failed and insolvent banks – yet charles you want us to “avoid the destruction of society for ideological reasons”. My ideological reason is I want the best outcome. Bailing out failed banks again will merely prolong the crisis and make it worse, possibly engendering a worse recession that already may or may not exist.

    Now charles, please tell me what year the recession happened and what laws have been repealed since then?

    Please don’t tell me you made this part up about laws being repealed.

    Note that Bill Clinton, who infamously pushed for a revised Community Reinvestment Act also did some good by repealing Glass Steagall. He thinks this was a good decision despite opposition from his own camp as he says that it allowed for the smooth takeover of some brokers and banks in the current crisis. Liquidity and solvency are a problem now – but critics on the economic left want to regulate the industry so it doesn’t have any ability to raise liquidity itself, but be bought out by the Government, and then non performing loans can then be paid directly by the taxpayer, rather than subsidising potential losses.

    It is a well known fact that there was a signal in the producer prices and production orders etc in 1988 about an impending recession – (Western Governments had high debt and high inflation and did not yet understand the finer points of monetary targeting) this might have created a small crisis – but Bush I went to an expensive war, oil got expensive, debt soared and the S&Ls continued to be bailed out. A small crisis did turn out to be a recession, but only after spending a lot of money by paraphrasing you: ” to stop the destruction of society (against) ideological reasons”.

    charles – it is quite clear, every time the US has

    1. Attempted to make banks loan to people who cannot afford to service the debt.

    2. Bailed out banks.

    3. Promises to bail out banks and depositors.

    4. Goes a little hard on the credit card and ventures somewhere to make oil expensive.

    Things go belly up.

    This isn’t because of deregulation (or at least explain why the deregulation has ended in crisis, instead of making this unfounded assertion).

    It is precisely because of regulation and economic interventionism. 1.-4. are prime examples of regulation and fiscal recklessness gone amok.

    The role of regulation in sub prime and the savings and loans has been explained. The role of deregulation is an unfounded assertion. Economic interventionism include inflationary monetary policy. When inflation ends, there is an asset-liability mismatch and banks can be become insolvent simply since the business conditions change.

    Inflation of the 1970s supported a lot of non-viable banks. This was simply one form of malinvestment that encouraged investment in uneconomic activity that leads to a short term boom but a long term trend downwards. As in 1988 and now, when we have institutional factors like coercive conditions put on lenders to make non performing loans, macroeconomic shocks (credit cycle, oil, Bush deficitism) strike the vulnerabilities of our economy.

  11. “As a true libertarian based government couldn’t fund a war, that has to be a tick to the libertarian view.”

    charles, this is just an out and out lie. Please apologise.

    Rebellion era and early independent America funded military expenditure through consumption taxes and voluntary donations.

    America decisively won every war during this period, using the most up to date weapons available.

  12. I just received an Email from Ron Kitching with some interesting views on this: –

    I have yet to see a leader of any nation make a sensible proclamation about his nation’s or the world’s economic state of affairs.

    They all want to see the credit boom extended. The fact of the matter is, credit has been extended that has not been backed by any accompanying value. Banks have loaned money they do not have.

    The collapse is an impersonal natural state of economic affairs that will impartially liquidate all malinvestments until a state of equilibrium is reached. That is, where finally genuine market opportunities can be impartially sustained by market activity.

    I noticed Frank Lowy said this morning (12.10.08): “The world has been living beyond its means.” Frank would be a pretty good judge. And a much better judge than the local Prime Minister of the World, and illustrious Liberal leader, Malcolm Turnbull, both of whom have lived off, and advocate ever continuing credit expansion.

    All of this reminds me of a stallion that has been desexed. When a mare goes past his paddock, he still canters up and down the fence whinnying, announcing his intentions.

    The U. S. the UK, European and Australian and many many other nation’s Treasurers are galloping up and down the fence, making a lot of noise, with the idea in their head that they are still “entire”. But they are not.

  13. Good heavens!

    “As a true libertarian based government couldn’t fund a war, that has to be a tick to the libertarian view.”

    “True libertarian,” as opposed to a ‘false’ libertarian government? And, “couldn’t fund a war”? “Couldn’t”?

    The ineffectivness of libertarian political candidates at winning elections is largely the result of the massive intellectual confusion by so many libertarians about what is, and what is not, libertarian philosophy. So long as so many libertarians try to reduce their philosophy down to a mere ideology, they will rightly lose the confidence of freedom-loving voters who are the one group most famous for their fighting–and funding–wars for their freedom.

    The pacifism promoted by some libertarians–such as Cato–is an intellectual contradiction of their philosophy. ‘Peace’ and ‘freedom’ are to ‘passive’ and ‘pro-active,’ as ‘ideal’ is to ‘moral.’ Which is to say, the grounds of freedom as a philosophy are moral and active, while the grounds of peace are idealist and passive: In short, two disparate psychologies are at work.

    War in defense of freedom is moral; war to impose freedom (Napoleon; arguably, Mr. Bush) is immoral. But nowhere in the philosophy of freedom is the “true” libertarian incapable of waging war. However, in the ideology of freedom, pacifism is an ideal mistaken as a moral.

    Perhaps the best way to explain the contradiction is to suggest the paraphrase of Immanuel Kant’s famous formula: ‘World freedom achieves world peace.’ That doesn’t call for war, but it sure recognizes, philosophically, that an enduring world ‘peace’ will never be achieved by trying to build peace.

  14. Yet reading the following article leaves me wonders whether governments make good administrators:-
    .
    Of course they do Terje. The US government’s being run by a fine upstanding successful business man who record of exemplary behaviour and success in honest trading is beyond reproach. 🙂

  15. What deregulation of the last twenty years charles. There has been absolutely no deregulation in the last twenty years.
    We,ve got to stop this fantasy-talk. There has absolutely been no net deregulation in the last twenty years. There has rather been the strengthening of special priviledges for the bankers.

  16. graemebird

    If your interested in world events and bank deregulation do a google search for “Repeal Glass-Steagall Act of 1933”.

  17. Duoist

    It’s all rhetoric. A modern war requires a little more than freedom loving individual and their little pop guns. It requires a centralized government that taxes and spends billion of those taxes on developing more and more effective destructive devices.

  18. Mark Says:

    “Rebellion era and early independent America funded military expenditure through consumption taxes and voluntary donations.

    America decisively won every war during this period, using the most up to date weapons available.”

    I’m socked Mark, so there is a role for government?

  19. Terje – did you also notice that GM and Ford managed to get a $25bn bailout package of their own thrown in last week.

  20. Charles, one of the psalmists notes that there is a role for evil men- as kindling on the day of judgement!
    So with Governments- as a footnote in a libertarian history book, or as the ash which fertilises a free economy.
    I just bet that this all creates more power to central governments, as though more of the poison will cure you, not kill you.

  21. “It’s all rhetoric. A modern war requires a little more than freedom loving individual and their little pop guns. It requires a centralized government that taxes and spends billion of those taxes on developing more and more effective destructive devices.”

    Oh right charles, you mean like the “effectiveness” GWH Bush?

    Can you imagine Rudd trying to praise this strategy on national TV?

    Despite priding yourself on ignorance, the Americans used the best weaponry available. They couldn’t have beaten the British otherwise.

    It’s not rhetoric charles. Stop being so ignorant and learn some history.

    charles – you are an intellectual vandal. Libertarianism isn’t about abolishing Governments. It is about minimising the role of Government.

    Mind you, revolutionary America was never “a Government” until the volunteers defeated the British and had the right to form their own Government.

    charles will now go onto prove since the Americans decided to form their own Government, that this justifies the New Deal, US Farm Bill, 960 billion USD federal deficit…a completely academically vacuous position to cling onto.

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