Fixing the US Housing Finance System

This is a summary of a working paper available at the links for which comments are welcome. (An earlier post on related topics appeared here.)

Download the paper (500KB pdf).

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The Administration will soon propose legislation to address the future of the US housing finance system, and it’s a sure bet that this will include re-incarnating Fannie and Freddie in some form. Prominent Republican politicians have also recently called for “privatizing” these entities. This is sheer folly. The problem with keeping Fannie and Freddie or an alternative government sponsored capital market hybrid that seeks to limit and/or price government backing is that policymakers have always done just that! It was investors, not policy-makers, who conferred “agency status” on Fannie and Freddie in spite of their prior ill designed privatizations.

Regardless of whether you believe they were leaders or followers in the sub-prime lending debacle—and the evidence overwhelmingly favors the former view–they have always represented a systemic risk and are inherently inconsistent with a competitive financial system. There are significant roles for government in a competitive market oriented housing finance system, but this isn’t one of them.

Public deposit protection is here to stay. Nobody is suggesting getting rid of the Federal Deposit Insurance Corporation, but public protection requires appropriate regulation.

Whether homeownership subsidies such as the mortgage interest deduction are appropriate is an ongoing debate. Nobody is suggesting getting rid of all homeownership subsidies, but credit subsidies for low-income borrowers and other politically preferred groups should be budgeted, targeted and separated from finance.

Discrimination in lending that is not based on the ability to pay is illegal. Nobody is suggesting relaxing current anti-discrimination laws and regulations, but competition often mitigates all forms of inappropriate lending discrimination better than regulation.

Capital market financing will remain necessary. Nobody is suggesting getting rid of the FHA/Ginnie Mae program or the almost equally massive Federal Home Loan Bank System, but reforms of these programs are necessary after the housing markets recover.

Private label mortgage securitization contributed to the sub-prime lending debacle. Nobody condones the abuses, but private label securitization worked well until regulatory distortions encouraged securitizers to bypass the private mortgage insurance industry, the traditional gatekeepers responsible for preventing excessively risky lending.

A competitive market oriented system serves qualified home borrowers and lenders best but has few political constituents. Politicians much prefer the deferred off budget costs of Fannie and Freddie but the long run costs of delivering subsidies that way far exceed the benefits.

The four steps necessary to restore a stable competitive market oriented housing finance system are:

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Chicago Tea Party Event: Wednesday, December 1 at 7:00 PM

The next meeting of the Chicago Tea Party will be held on Wednesday, December 1 at 7:00 PM at Blackie’s, 755 S. Clark. (Or sign-up through Facebook.)

I am going to this meeting. I have never been to a Tea Party meeting, so far, for some reason. I recently exchanged emails with Steve Stevlic, Director, Tea Party Patriots Chicago. I look forward to meeting him.

Perhaps some of our ChicagoBoyz readers will be there as well.

UPDATE: Note this is a monthly event, occurring the first Wednesday of every month.

The featured speaker will be Adam Andrzejewski from For the Good of Illinois. Adam is promoting transparency in Illinois government through the Open the Books project. This is a strong added inducement to attend. Please look at the links to his organizations above, and see the good work he is continuing to do.

I supported Adam on this blog when he was running for the Republican nomination for governor. I had the pleasure of speaking to Adam recently, and I said, and I firmly believe, that had he been nominated, the energy and excitement that caused a GOP groundswell nationwide would have carried him to victory as well. Adam would have presented a real alternative. (As I also told him, he is the only person I have ever voted for, not counting Reagan in 1984, who I actually thought would do a good job, rather than simply voting against the Democrat.) Brady ran a lifeless and low-risk campaign, a typical idea-free Illinois Republican campaign, that was completely at odds with the spirit of 2010. He stumbled to defeat in a year where victory was there for the grasping, with the Republicans picking Obama’s old Senate seat and four Houses seats in Illinois. There are times when fortune really does favor the bold, and this year was one of them. As a result we in Illinois are stuck once again with the feckless and hopelessly wrongheaded Pat Quinn, while the state swirls down the drain, an Island of Blue in a Red Midwestern sea, a big, out of step, bankrupt state like New York or Calilfornia. Too bad.

As it happens, more or less by luck, I was at the first-ever Tea Party protest in Chicago on February 27, 2009 on Daley Plaza. My office at that time was across the street, and I walked over just to see what was going on. I recall it was very cold. The crowd was well-behaved, with a smattering of obvious psychos, as you inevitably find at any gathering on Daley Plaza. There were a lot of obviously home-made signs, some of which were clever. I also recall someone was talking (I think it was Dan Proft) and whoever the speaker was said the word “Repubican” and got an immediate, loud, angry BOO from many in the crowd. That was striking. The crowd seemed more anti-partisan than non-partisan, and certainly not pro-Republican. I said to myself: “hmmm, something new and interesting is astir in the land, a great and angry giant may at last be awakening” or prescient and prophetic words to that general effect. (You will have to take my word for it.) However, the movement that was getting started then has greatly exceeded my hopes and expectations, and I think we have still only seen the beginning of a historic mass movement.

How to deal with North Korea

While I’ve been purposefully avoiding any news shows or blogs this weekend, the situation in North Korea forces me to post this potential solution to the problem. Let’s start with some premises.

1. NK is a buffer state for China. It exists at China’s will.
2. NK is a clear and present danger to its own people and to the world.
3. China, belligerent and “ascendant” as she may be, is linked to our currency and to our consumption of her cheap goods.

While I could add details and subheadings to the above, I think the premises are sound. If not please correct me.

With that in mind, why shouldn’t America, in the person of its CEO, simply offer China the ultimatum below.

Dear Hu,

This nation tires of the dangerous and evil games played by Kim Jong Il. He is a dangerous man who is actively destroying his own people. The United States has played the diplomatic games with this madman long enough, yet fully realizes that we have no optimal military option.

Given that you have it with in your power as a nation to change the nature of NK, and that you clearly are using NK as a threatening buffer state, I see no reason to remain diplomatically engaged with the buffer state puppet – Kim Jong Il. I think we will deal with your nation alone.

With that in mind, I offer the following ultimatum. You will immediately begin the process of forcing regime change in NK. The best solution would be for you to begin the process of reunification, but I would be happy to hear other alternatives.

If you fail to begin this process, I will use all my administrative powers, and lobby Congress to use its powers to shut down all trade with China until such regime change is effected.

Sincerely,

President Obama (or his successor)

Why shouldn’t we use trade as weapon in this situation? Aside from hurting Walmart’s stock price for a few quarters and losing a few transportation jobs in the interim, why can’t we do this? Discuss.

“Chesterton’s Warning”

It sounds like a preoccupation of the exotic fringe to most of us now, but nine decades ago eugenics was openly advocated as a mainstream Progressive idea. Indeed, the most certifiably advanced minds of the day promoted and celebrated it. In 1923, former President Charles W. Eliot of Harvard, U.S. Senator Royal Copeland of New York, former President David Starr Jordan of Indiana and Stanford Universities, President Livingston Farrand of Cornell University, and a host of other educational, medical and social-welfare luminaries making up the Eugenics Committee of the United States came forth with a program calling for “selective immigration, sterilization of defectives and control of everything having to do with the reproduction of human beings.” In 1932, Margaret Sanger, founder of the organization that would eventually become Planned Parenthood, advocated “a stern and rigid policy of sterilization and segregation to that grade of population whose progeny is already tainted or whose inheritance is such that objectionable traits may be transmitted to offspring.” Nor was support restricted to a secularist avant-garde. As Christine Rosen has shown, many American Christian and Jewish religious leaders, including even some Roman Catholics, were fully supportive of eugenic ideas and policies. It was no fringe phenomenon.1

Wilfred M. McClay, The American Interest.

(1) RESTREPO Monday, 11/29/10 at 9PM ET/PT; (2) Maj.Gen. Scales on Small Unit Dominance

This is the television premier of this extraordinarily film. I wrote about seeing this filmhere.

Restrepo chronicles the deployment of a platoon of U.S. soldiers in Afghanistan’s Korengal Valley. The movie focuses on a remote 15-man outpost, Restrepo, named after a platoon medic who was killed in action. It was considered one of the most dangerous postings in the U.S. military. This is an entirely experiential film: The cameras never leave the valley; there are no interviews with generals or diplomats. The only goal is to make viewers feel as if they have just been through a 94-minute deployment. This is war, full stop. The conclusions are up to you.

I highly recommend this film to all of our readers.

An information page for Restrepo is here, including video.

On a related note, I also highly recommend this article entitled Small Unit Dominance: The Strategic Importance of Tactical Reform, by Maj.Gen. Robert H. Scales.

Slightly more than 40 years ago my unit was butchered by elements from the North Vietnamese 29th Regiment at a mountaintop firebase overlooking the A Shau Valley. Nineteen of my 55 soldiers were killed or wounded severely enough to warrant evacuation. The loss was mainly my fault. I wasn’t new at the job. This was my fourth command so I thought I knew what I was doing. A much smarter and better trained and equipped enemy taught me that I did not.
 
The event made me promise that I would never go to war again No. 2 in a two-sided contest. It also burned into the depths of my soul several questions that have lingered and festered ever since. I asked why the most technologically advanced country on the planet was unable to make better weapons and equipment than the enemy. I asked why my soldiers were so poorly prepared physically, intellectually and emotionally for this fight. I asked why my experience as a combat leader could be gained only by spilling their blood.

Maj.Gen. Scales goes on to say:

In July, I watched the Afghanistan war documentary “Restrepo” play out on the screen and compared it to my experience decades ago: same type of unit (airborne light infantry), same lousy rifle (M16/M4), same helicopter (CH-47), same machine gun (M2), same young men trying to deal with the fear of violent death. Seared in my brain is the image of a young soldier at Fire Base Restrepo hacking away at hard clay and granite trying frantically to dig a fighting position. The U.S. is spending more than $300 billion on a new fighter plane. We haven’t lost a fighter pilot to enemy action since 1972. Why after nine years of war can’t we give a close-combat soldier a better way to dig a hole? For that matter, why do soldiers exiting fire bases not have some means of looking over the next hill? Why doesn’t every soldier have his own means to talk to his comrades by radio? Why can’t soldiers on a remote fire base detect an approaching enemy using sensors? Why can’t soldiers rely on robots to carry heavy loads and accomplish particularly dangerous tasks? I could go on, but you get the point.

Why indeed. I was struck by the same questions. Much of the American arsenal verges on science fiction. But what you see in Restrepo would be familiar to soldiers from 50 or more years ago. In fact, an infantry platoon from 1918 would be very roughly like one of platoon depicted in Restrepo, while an airplane from that era is from an entirely different universe from the aircraft of today.

Air and sea dominance have served us well, though the cost of maintaining them seems to be snowballing out of control. Nonetheless, with the USA fighting land wars against committed opponents we need to spend effort on gaining an edge in that domain as well. Our enemies drag us down to their level, where their numbers and home-field advantage are most telling, when we engage in this type of labor-intensive combat. We cannot match their numbers, and skill and training alone will not prevail over those numbers. Additional tools beyond what they can match may make the difference. Having a Buck Rogers aircraft overhead, while hacking out a hole with a shovel in the hard earth below, shows a misdirection of resources.

(h/t to Adam Elkus for this article.)