By PETER J. WALLISON
On Christmas Eve, when most Americans’ minds were on other things, the Treasury Department announced that it was removing the $400 billion cap from what the administration believes will be necessary to keep Fannie Mae and Freddie Mac solvent. This action confirms that the decade-long congressional failure to more closely regulate these two government-sponsored enterprises (GSEs) will rank for U.S. taxpayers as one of the worst policy disasters in our history.

Fannie and Freddie’s congressional sponsors—some of whom are now leading the administration’s effort to “reform” the financial system—have a lot to answer for. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, sponsored legislation adopted in 2008 that established a new regulatory structure for the GSEs. But by then it was far too late. The GSEs had begun buying risky loans in 1993 to meet the “affordable housing” requirements established under congressional direction by the Department of Housing and Urban Development (HUD).

Most of the damage was done from 2005 through 2007, when Fannie and Freddie were binging on risky mortgages. Back then, Mr. Frank was the bartender, denying that there was any cause for concern, and claiming that he wanted to “roll the dice” on subsidized housing support.

In 2005, the Senate Banking Committee, then controlled by Republicans, adopted tough regulatory legislation that would have established more auditing and oversight of the two agencies. But it was passed out of committee on a partisan vote, and with no Democratic support it never came to a vote.

By the end of 2008, Fannie and Freddie held or guaranteed approximately 10 million subprime and Alt-A mortgages and mortgage-backed securities (MBS)—risky loans with a total principal balance of $1.6 trillion. These are now defaulting at unprecedented rates, accounting for both their 2008 insolvency and their growing losses today. Since 2008, under government control, the two agencies have continued to buy dicey mortgages in order to stabilize housing prices.

Read entire article here.

Deja vu all over again: Fueling the next housing meltdown

Charles Hugh Smith
Sep 8th 2009 at 4:00PM

Low down payments, risky mortgages guaranteed by government entities, rising defaults — haven’t we been here before? Isn’t this the same mix of easy money and poor risk-management that blew up the housing market in 2007 and 2008?

You’d think the mortgage industry and the federal government would have learned their lesson since the housing bubble’s collapse. But you’d be wrong. Essentially, nothing has changed, except the names of the government-sponsored enterprises.
Freddie Mac and Fannie Mae, the GSEs that fueled the great housing bubble of 2002 to 2007, melted down once a substantial portion of the trillions of dollars of risky mortgages they’d underwritten began defaulting. Now that taxpayer-funded bailouts have footed the bill, Fannie and Freddie are mere shadows of their former freewheeling selves.
Read entire article here.

I don’t know about you but I am not sold on the stimulus package. Yes I understand that there are a lot of people hurting. However, making decisions based on emotions is not going to solve the problem. The mere fact that Obama  stated that the American people “don’t need to be convinced”, is out of touch. For the most part this is a very partisan stimulus package. Gary Becker, Nobel economic laureate and Kevin Murphy,  a senior fellow at the Hoover Institution in an opinion piece in the Wall Street Journal were skeptical as well. Below are three excerpts from the article:

In addition, although politics play an important part in determining all government spending, political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they’ve long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test.

The increased federal debt caused by this stimulus package has to be paid for eventually by higher taxes on households and businesses. Higher income and business taxes generally discourage effort and investments, and result in a larger social burden than the actual level of the tax revenue needed to finance the greater debt. The burden from higher taxes down the road has to be deducted both from any short-term stimulus provided by the spending program, and from its long-run effects on the economy.

Our own view is that the short-term stimulus from the legislation before Congress will be smaller per dollar spent than is expected by many others because the package tries to combine short-term stimulus with long-term benefits to the economy. Unfortunately, short-term and long-term gains are in considerable conflict with each other. Moreover, it is very hard to spend wisely large sums in short periods of time. Nor can one ever forget that spending is not free, and ultimately it has to be financed by higher taxes.

Obama says, “a failure to act will only deepen this crisis.” I say acting emotionally, without all the facts and rushing into spending $827 billion dollars is a mistake. If your house is burning down you act. You call the fire department and get out the hose or your neighbors hose if it is safe. You don’t act by going into the garage and pouring gas on the flames. You have to act appropriately.

I recently saw an ad signed by over 200 economist, including three Nobel prize winners that stated:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

I trust Nobel prize winning economists over any politician for the simple fact that politicians by nature are not necessarily concerned about you or the United States as they are about votes.

Finally, it is hard to believe that the government is going to solve a problem they had a hand in creating. George W. Bush and the republicans did not create this problem. Look into the government sponsored enterprises of Fannie Mae and Freddie Mac. They were encouraged to expand and buy mortgaged backed securities. Even risky sub prime mortgages. The government told us that AIG, Citi and other large companies were too big to fail. I say this stimulus package is too big to fail. Let’s get it right the first time and not waste one dollar of tax payers money.