More From The CBO

[Conan71]

Not sure why you think an industry like healthcare is so brittle as to fail completely if costs are capped.  A more likely scenario is the the sector ceases to expand and might contract a bit as it gets more efficient to deal with smaller amounts of capital.  That's the point, right?  Not to kill it but to moderate an out-of-control sector of the economy. 

Who ever thought there would be another Wall St. melt-down and the entire lending system would collapse?  Who ever thought the U.S. government would have to bail out GM and Chrysler?  Don't think that gov't safety and environmental  regulations and mandates didn't have anything to do with both companies becoming uncompetitive in global markets.  I'm not saying safety and environmental concerns are not important, I'm simply illustrating how government mandate can have unintended economic consequences.

If the health insurance industry is, in fact, operating on a 2.5 to 5% profit margin and they suddenly are faced with more claim pay-outs than they can keep up with on premium growth, guess what could happen? 

It's kind of like telling a widget maker that he can only sell his widgets for $1000 when they actually cost $1100 to make, or having an arbitrary cap on final price when raw material prices suddenly rise.

[we vs us]

Of course govt mandates can change the cost of an item, or market conditions over all. But that's only one pressure among a bunch of different pressures in any market.  And in general it's not a static system.  It's not a straight line from govt regs to FAIL.  In your widget example, the company would work with the market environment -- which includes but is not limited to those govt regs -- and reduce overhead to find its profit margin again. Fire people?  Maybe.  Negotiate better raw material prices?  More likely.  Look for inefficiencies in delivery or production?  Another good one.  There're all kinds of places to reduce your costs without folding up the shop and going home.

In GM's case, it's solidly management's fault it didn't deal successfully with the regulatory environment.  Plenty of other car companies have flourished under the same regime. And Wall Street's collapse is directly related to lack of regulation.  Everything from AIG's swaps, to Lehman Bros' derivative markets, to the whole subprime mortgage-as-security scheme which consumed all the major banks. No one was watching and it got waaaaay out of hand. But that's another thread altogether 

[Gaspar]

it's not that no one was watching We vs Us.  Bush, McCain, and many others made over 20 pleas to congress.  Barney Frank refused to listen.  Congress refused to act.  Bush made his first plea for reform in 2001.  He made 17 more after that, and congress refused to act.  The bubble was very visible. 



2001

April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity." 

Ignored!

2002

May: The President calls for the disclosure and corporate governance principles contained in his 10-point plan for corporate responsibility to apply to Fannie Mae and Freddie Mac. (OMB Prompt Letter to OFHEO, 5/29/02)

Ignored!

2003

January: Freddie Mac announces it has to restate financial results for the previous three years.

Ignored!

February: The Office of Federal Housing Enterprise Oversight (OFHEO) releases a report explaining that "although investors perceive an implicit Federal guarantee of [GSE] obligations," "the government has provided no explicit legal backing for them." As a consequence, unexpected problems at a GSE could immediately spread into financial sectors beyond the housing market. ("Systemic Risk: Fannie Mae, Freddie Mac and the Role of OFHEO," OFHEO Report, 2/4/03)

Ignored!

September: Fannie Mae discloses SEC investigation and acknowledges OFHEO's review found earnings manipulations.

Ignored!

September: Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend that Congress enact "legislation to create a new Federal agency to regulate and supervise the financial activities of our housing-related government sponsored enterprises" and set prudent and appropriate minimum capital adequacy requirements.

Ignored!

October: Fannie Mae discloses $1.2 billion accounting error.

Ignored!

November: Council of the Economic Advisers (CEA) Chairman Greg Mankiw explains that any "legislation to reform GSE regulation should empower the new regulator with sufficient strength and credibility to reduce systemic risk." To reduce the potential for systemic instability, the regulator would have "broad authority to set both risk-based and minimum capital standards" and "receivership powers necessary to wind down the affairs of a troubled GSE." (N. Gregory Mankiw, Remarks At The Conference Of State Bank Supervisors State Banking Summit And Leadership, 11/6/03)

Ignored!

"These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."

[Congressional Black Caucus member] Representative Melvin L. Watt, Democrat of North Carolina, agreed.

"I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing," Mr. Watt said.

2004

February: The President's FY05 Budget again highlights the risk posed by the explosive growth of the GSEs and their low levels of required capital, and called for creation of a new, world-class regulator: "The Administration has determined that the safety and soundness regulators of the housing GSEs lack sufficient power and stature to meet their responsibilities, and therefore...should be replaced with a new strengthened regulator." (2005 Budget Analytic Perspectives, pg. 83)

Ignored!

February: CEA Chairman Mankiw cautions Congress to "not take [the financial market's] strength for granted." Again, the call from the Administration was to reduce this risk by "ensuring that the housing GSEs are overseen by an effective regulator." (N. Gregory Mankiw, Op-Ed, "Keeping Fannie And Freddie's House In Order," Financial Times, 2/24/04)

Ignored!Ignored!Ignored!

June: Deputy Secretary of Treasury Samuel Bodman spotlights the risk posed by the GSEs and called for reform, saying "We do not have a world-class system of supervision of the housing government sponsored enterprises (GSEs), even though the importance of the housing financial system that the GSEs serve demands the best in supervision to ensure the long-term vitality of that system. Therefore, the Administration has called for a new, first class, regulatory supervisor for the three housing GSEs: Fannie Mae, Freddie Mac, and the Federal Home Loan Banking System." (Samuel Bodman, House Financial Services Subcommittee on Oversight and Investigations Testimony, 6/16/04)

Ignored!

2005

April: Treasury Secretary John Snow repeats his call for GSE reform, saying "Events that have transpired since I testified before this Committee in 2003 reinforce concerns over the systemic risks posed by the GSEs and further highlight the need for real GSE reform to ensure that our housing finance system remains a strong and vibrant source of funding for expanding homeownership opportunities in America... Half-measures will only exacerbate the risks to our financial system." (Secretary John W. Snow, "Testimony Before The U.S. House Financial Services Committee," 4/13/05)

Ignored!

2007

July: Two Bear Stearns hedge funds invested in mortgage securities collapse.

Ignored!

September: RealtyTrac announces foreclosure filings up 243,000 in August – up 115 percent from the year before.

Ignored!

September: Single-family existing home sales decreases 7.5 percent from the previous month – the lowest level in nine years. Median sale price of existing homes fell six percent from the year before.

December: President Bush again warns Congress of the need to pass legislation reforming GSEs, saying "These institutions provide liquidity in the mortgage market that benefits millions of homeowners, and it is vital they operate safely and operate soundly. So I've called on Congress to pass legislation that strengthens independent regulation of the GSEs – and ensures they focus on their important housing mission. The GSE reform bill passed by the House earlier this year is a good start. But the Senate has not acted. And the United States Senate needs to pass this legislation soon." (President George W. Bush, Discusses Housing, The White House, 12/6/07)

Ignored! Ignored!

2008

January: Bank of America announces it will buy Countrywide.

January: Citigroup announces mortgage portfolio lost $18.1 billion in value.

February: Assistant Secretary David Nason reiterates the urgency of reforms, says "A new regulatory structure for the housing GSEs is essential if these entities are to continue to perform their public mission successfully." (David Nason, Testimony On Reforming GSE Regulation, Senate Committee On Banking, Housing And Urban Affairs, 2/7/08)

March: Bear Stearns announces it will sell itself to JPMorgan Chase.

March: President Bush calls on Congress to take action and "move forward with reforms on Fannie Mae and Freddie Mac. They need to continue to modernize the FHA, as well as allow State housing agencies to issue tax-free bonds to homeowners to refinance their mortgages." (President George W. Bush, Remarks To The Economic Club Of New York, New York, NY, 3/14/08)

Ignored!

April: President Bush urges Congress to pass the much needed legislation and "modernize Fannie Mae and Freddie Mac. [There are] constructive things Congress can do that will encourage the housing market to correct quickly by ... helping people stay in their homes." (President George W. Bush, Meeting With Cabinet, the White House, 4/14/08)

Ignored!  Ignored!Ignored!Ignored!Ignored!

May: President Bush issues several pleas to Congress to pass legislation reforming Fannie Mae and Freddie Mac before the situation deteriorates further.

"Americans are concerned about making their mortgage payments and keeping their homes. Yet Congress has failed to pass legislation I have repeatedly requested to modernize the Federal Housing Administration that will help more families stay in their homes, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance sub-prime loans." (President George W. Bush, Radio Address, 5/3/08)

Ignored!

"[T]he government ought to be helping creditworthy people stay in their homes. And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong, independent regulator." (President George W. Bush, Meeting With The Secretary Of The Treasury, the White House, 5/19/08)

Ignored!

"Congress needs to pass legislation to modernize the Federal Housing Administration, reform Fannie Mae and Freddie Mac to ensure they focus on their housing mission, and allow State housing agencies to issue tax-free bonds to refinance subprime loans." (President George W. Bush, Radio Address, 5/31/08)

Ignored!

June: As foreclosure rates continued to rise in the first quarter, the President once again asks Congress to take the necessary measures to address this challenge, saying "we need to pass legislation to reform Fannie Mae and Freddie Mac." (President George W. Bush, Remarks At Swearing In Ceremony For Secretary Of Housing And Urban Development, Washington, D.C., 6/6/08)

Ignored!

Letter to congress. . .
We are concerned that if effective regulatory reform legislation for the housing-finance government sponsored enterprises (GSEs) is not enacted this year, American taxpayers will continue to.be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole. Therefore, we offer you our support in bringing the Federal Housing Enterprise Regulatory Reform Act (S. 190) to the floor and allowing the Senate to debate the merits of this bill, which was passed by the Senate Banking Committee.

Congress chartered Fannie and Freddie to provide access to home financing by maintaining liquidity in the secondary mortgage market. Today, almost half of all mortgages in the U.S. are owned or guaranteed by these GSEs. They are mammoth financial institutions with almost $1.5 Trillion of debt outstanding between them. With the fiscal challenges facing us today (deficits, entitlements, pensions and flood insurance), Congress must ask itself who would actually pay this debt if Fannie or Freddie could not?

Substantial testimony calling for improved regulation of the GSEs has been provided to the Senate by the Treasury, Federal Reserve, HUD, GAO, CBO, and others. Congress has the opportunity to recommit itself to the housing mission of the GSEs while at the same time making sure the GSEs operate in a manner that does not expose our financial system, or taxpayers, to unnecessary risk. It is vitally important that Congress take the necessary steps to ensure that these institutions benefit from strong and independent regulatory supervision, operate in a safe and sound manner, and are primarily focused on their statutory mission. More importantly, Congress must ensure that the American taxpayer is protected in the event either GSE should fail. We strongly support an effort to schedule floor time this year to debate GSE regulatory reform.

Sincerely,

(signed)

John McCain

REP. BARNEY FRANK, D-MASS.: I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under. They're not the best investments these days from the long-term standpoint going back. I think they are in good shape going forward.

Ignored!

July: Congress heeds the President's call for action and passes reform of Fannie Mae and Freddie Mac as it becomes clear that the institutions are failing.

Not Ignored.  Bush blamed!  People to stupid to know any different!

[img]http://johnbatchelorshow.com/images/2008_11_10t173919_398x450_us_usa_gambling_internet.jpg[/img

[Conan71]

Of course govt mandates can change the cost of an item, or market conditions over all. But that's only one pressure among a bunch of different pressures in any market.  And in general it's not a static system.  It's not a straight line from govt regs to FAIL.  In your widget example, the company would work with the market environment -- which includes but is not limited to those govt regs -- and reduce overhead to find its profit margin again. Fire people?  Maybe.  Negotiate better raw material prices?  More likely.  Look for inefficiencies in delivery or production?  Another good one.  There're all kinds of places to reduce your costs without folding up the shop and going home.

In GM's case, it's solidly management's fault it didn't deal successfully with the regulatory environment.  Plenty of other car companies have flourished under the same regime. And Wall Street's collapse is directly related to lack of regulation.  Everything from AIG's swaps, to Lehman Bros' derivative markets, to the whole subprime mortgage-as-security scheme which consumed all the major banks. No one was watching and it got waaaaay out of hand. But that's another thread altogether 

Negotiating raw material costs isn't as simple as it sounds. 

What's the cost of running a tighter ship?  Limiting or not providing employee benefits like health insurance or retirement/pension/401K, or cutting workforce.  Again the worst of unintended consequences.  Limiting spending on new captial projects or capital equipment which helps keep other parts of the economy moving.  All things no one wants to see.

[we vs us]

Negotiating raw material costs isn't as simple as it sounds. 

What's the cost of running a tighter ship?  Limiting or not providing employee benefits like health insurance or retirement/pension/401K, or cutting workforce.  Again the worst of unintended consequences.  Limiting spending on new captial projects or capital equipment which helps keep other parts of the economy moving.  All things no one wants to see.

We've been having a running discussion in our sales office about what our changed economic circumstances have forced us to do.  While all the basic awful things you'd expect have happened -- less money for sales trips and client entertainment, fewer staff, pressure from above to perform etc -- it's also forced us to be creative and to expand our idea of what good business is.  In fact, I owe my job in part to that question . . . my position as written didn't exist until they decided that we had to branch out into new markets.  And these new markets are ultimately going to make us healthier as things rebound.  We'll have a much more broad base of clients to count on, and more varied revenue. 

Point being is that while changes in the overall market are challenging, there are all sorts of ways to counter them, not all of them destructive. 

By all accounts healthcare sector specifically is so swollen that actually shrinking it is in the interest of all the other economic sectors.  Payments to the healthcare industry amount to a tax on everything already, and a tax that is 1) outpacing inflation by double digits and 2) resulting in fewer and fewer people getting their money's worth from the tax (taking into consideration those who are dropped by insurance, those whose companies chose to cover them at reduced rates or not at all, or those who never were covered but still need care). 

[we vs us]

And Gassy, focusing only on Fannie and Freddie gives an incomplete picture of how everything almost collapsed.   AIG alone had unregulated credit default swaps on its books in 2007 amounting to $440 billion.  That had nothing to do with the housing crash, but could have easily destroyed the global economy.  Other problems related to regulation were:  ratings companies (Moody's, Standard and Poor's, etc) who were essentially being paid by the clients they had to rate; a mortgage industry that discarded all of its best-practice standards in order to lend to subprime borrowers; and a series of investment houses who, because they were securitizing these loans, fed the need for them.  Fannie and Freddie were in there, too, backing bad loans, but they are by no means the entire problem.  

And seriously, don't get me started on derivatives.

EDIT: Oh, and while I'm at it:  the entirely unregulated and unsupervised Fed held interest rates so low for so long they encouraged the financial industry to chuck risk out the window so as to find a decent return on their holdings.

Really, everybody's implicated in this.

[Conan71]

And Gassy, focusing only on Fannie and Freddie gives an incomplete picture of how everything almost collapsed.   AIG alone had unregulated credit default swaps on its books in 2007 amounting to $440 billion.  That had nothing to do with the housing crash, but could have easily destroyed the global economy.  Other problems related to regulation were:  ratings companies (Moody's, Standard and Poor's, etc) who were essentially being paid by the clients they had to rate; a mortgage industry that discarded all of its best-practice standards in order to lend to subprime borrowers; and a series of investment houses who, because they were securitizing these loans, fed the need for them.  Fannie and Freddie were in there, too, backing bad loans, but they are by no means the entire problem.  

And seriously, don't get me started on derivatives.

EDIT: Oh, and while I'm at it:  the entirely unregulated and unsupervised Fed held interest rates so low for so long they encouraged the financial industry to chuck risk out the window so as to find a decent return on their holdings.

Really, everybody's implicated in this.

I do believe the point he was trying to make was quite simply that while lawmakers who could have done something and sounded an alarm played the fiddle (or with themselves) as Rome burned.  Democratic law makers, including Barney Frank and Chris Dodd (nice preferred rate from Countrywide) tried to blame all this on Republicans and President Bush when they were just as culpable.  Unfortuntely the dumb masses bought into this and essentially re-elected a lot of the people responsible for this lack of oversight on all levels in 2008.

[Gaspar]

Really, everybody's implicated in this.

Agreed!  Chuck em all!

[rwarn17588]

Unfortuntely the dumb masses bought into this and essentially re-elected a lot of the people responsible for this lack of oversight on all levels in 2008.

Isn't that because no one knew exactly who the responsible parties until well after Election Day? The credit collapse happened in September 2008, and it took months to sort everything out after the dust cleared.

[we vs us]

I do believe the point he was trying to make was quite simply that while lawmakers who could have done something and sounded an alarm played the fiddle (or with themselves) as Rome burned.  Democratic law makers, including Barney Frank and Chris Dodd (nice preferred rate from Countrywide) tried to blame all this on Republicans and President Bush when they were just as culpable.  Unfortuntely the dumb masses bought into this and essentially re-elected a lot of the people responsible for this lack of oversight on all levels in 2008.

Hence the "everybody's implicated" part.  I'll concede the point that Dems were as asleep at the switch as everybody else.  But that concession doesn't mean that Dems are somehow solely to blame, or that orgs that have been traditionally championed by libs (Fannie and Freddie) were the depth charges that set this all off.  It was pretty much a systemic failure and the bipartisan causes had been building for years.

[Gaspar]

Isn't that because no one knew exactly who the responsible parties until well after Election Day? The credit collapse happened in September 2008, and it took months to sort everything out after the dust cleared.

I think, even today, they would get re-elected.  They were re-elected by people who get their political insight from MTV and E! and Comedy Central.  

If Snookie likes Obama, they are going to vote for Obama again. I promise.

[RecycleMichael]

I think, even today, they would get re-elected.  They were re-elected by people who get their political insight from MTV and E! and Comedy Central.  

If Snookie likes Obama, they are going to vote for Obama again. I promise.

Oh please. Don't act as if only people who voted for Obama are poorly informed. Your disdain for anybody who doesn't agree with you has really come out in your recent posts.

For every Snookie, there is a Bubba on the other side.

[Conan71]

Isn't that because no one knew exactly who the responsible parties until well after Election Day? The credit collapse happened in September 2008, and it took months to sort everything out after the dust cleared.

Not true.  Do some Googling, search the archives on here for that matter.  I'm pretty certain we were discussing these people and their incestuous relationships in between Aug. '08 and Nov. '08

There were plenty of stories coming out about the cozy relationships certain Senators and Reps had with lenders and Wall St. at that time.

[Townsend]

poorly informed.

Poorly informed?

I find myself guilty.

Anything I think is just regurging from some talking head I saw on the news this morning.

I don't know anyone who's particularly informed.

Every time I see someone "on the street" they are just retelling the talking points we've been hammered with.

When I ask someone's opinion, they tell me what I've heard on the news already.

When I ask them why, they can't explain themselves without using someone from either side of the argument.

In the word of a skinny lawyer I've met, "Bah".

[Conan71]

Hence the "everybody's implicated" part.  I'll concede the point that Dems were as asleep at the switch as everybody else.  But that concession doesn't mean that Dems are somehow solely to blame, or that orgs that have been traditionally championed by libs (Fannie and Freddie) were the depth charges that set this all off.  It was pretty much a systemic failure and the bipartisan causes had been building for years.

No, but it was certainly typical of Democrats to try and deflect all blame to those wealthy, poor-hating, anti-regulation Republicans.  They flat-donkey lied through their teeth.  It's truly amazing to see how many Wall St., insurance, finance, and banking executives are heavy donors to the DNC, and Democrat candidates.  Yet the implication is that they are all in bed with the Repblicans and the GOP is in bed with them.