Measured by the dollar amount involved, the nationalisation of the mortgage guarantors Fannie Mae and Freddie Mac, announced today by the Bush Administration, is the largest in history. No less than $5 trillion of assets and obligations have been taken over by the US government in one hit.
Of course, that debt had long been regarded as having an implicit government guarantee and the companies involved were quangos (in the original sense of quasi-NGOs) rather than genuine private firms. Fannie was a government agency privatised in the 1960s, and Freddie was created to provide competiion for Fannie. So even though the US government will now guarantee virtually all new mortgages, this is more an admission of existing reality than a big step towards socialism.
While the quasi-governmental status of Fannie and Freddie was always problematic, this wasn’t the reason for their failure. Rather, they were pushed to accept increasingly bad loans made by the private sector. And when their difficulties became acute, the most satisfactory solution, under normal conditions, would have been to formalise the government guarantee of the existing loan book, then put them into run-off mode, writing no new business. But given the failure of the private sector, that would, mean, in effect, making it impossible for anyone to write a mortgage contract.
The fact that the credit crisis has reached this point marks the failure of the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state.
In the boom that created this crisis, every part of the financial system (retail banks and mortgage businesses, major Wall Street banks, the financial engineers who designed new securitisation assets, investment funds, ratings agencies and bond insurers) had a major role to play. All have failed miserably, even though most will get to keep the rich rewards they received when things were going well.
Further update As various commentators point out, the failure here is one of actually existing neoliberalism. The “unknown ideal” of a perfect free market system remains pure and unsullied by empirical experience.
More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.
John Quiggin 
isnt it both simultaneously john,
an admission of reality and a substantive step towards state socialism,
but right on with the main point though,
privatise the profits and socialise the risks,
its so warped
In the world economy centered on the G-7, I’d say there were two aspects to neoliberalism: the move to the Right within the G-7, and the promotion of certain economic policies by institutions dominated by the G-7, such as the IMF.
For a few years those institutions have been increasingly irrelevant, as new economic powers (BRICs and the Gulf) arise outside the G-7. I call it a neo-mercantile world. At the same time we’re getting economic stagnation and the credit crunch *within* the G-7. I guess I agree with the assessment, but I wonder if it’s not the international dimension which is the more important.
Given that a liberal, neo or otherwise, wouldn’t establish Fannie Mae and Freddie Mac in the first place, does this say anything about liberalism?
Just like the way the Soviet Union didn’t say anything about communism, because it was never properly applied.
Et cetera.
Deleted – see previous advice regarding lengthy lifts from other sites.
the central claim of the neoliberal program, namely that private capital markets, free from intrusive government regulation, can enable individuals and households to handle the risks they face more flexibly and efficiently than a social-democratic welfare state
Is that the smell of burning straw?
Neoliberalism as I understand the term is on the same spectrum as social-democratism, but with generally less regulation. I don’t think anyone in that tent wants no regulation at all, or claims to be able to avoid boom/bust cycles.
By not having a government-sponsored mortgage lender/underwriter, Australia has a more free market than the US, and so far we’ve fared better. If anything this situation seems like an argument for the government being a more active regulator but not a participant.
“More efficiently and flexibly,” compared to what? I was too young to see it, but I believe the old Australian system of a heavily regulated oligopoly of banks, some state-owned, didn’t do amazingly well at helping people save and invest at a reasonable price.
As if we needed any explanation of the delusional, self-important gobbledegook emanating from central bankers, here’s the Bank for International Settlements waxing lyrical about the whole discipline-
“The serious disruptions in interbank markets since August 2007 have firmly put the spotlight on central bank operations designed to implement monetary policy. Not only are the operating frameworks the least understood aspect of monetary policy, they also differ considerably across countries. After providing a conceptual roadmap to allow better understanding of the challenges central banks face in implementing monetary policy in times of stress, Claudio Borio and William Nelson of the BIS discuss how central bank responses to the recent financial turmoil have been influenced by the operating frameworks in place. The authors show that the frameworks can have a first-order influence on the size and type of liquidity injections employed and on the need for exceptional measures.”
Did you all get that? Basically it’s the ‘frameworks’ that noone can understand, yet it’s those same ‘frameworks’ that are so important in central bankers’ deliberations. And we actually pay these people to deliberate? Sheesh!
observa, I can think of many activities or professions where the most important part is the hardest part to understand.
re my post 6; I may sound more like an apologist than I mean to. Clearly the whole thing was pretty stupid, but I don’t think it proves much about liberalization vs regulation. It is in the nature of markets to boom and bust, whether they’re regulated or not.
“It is in the nature of markets to boom and bust..”
Well that’s the bone of contention mindful. How boomy and how busty? Austrian economics reckons it’s all about well intentioned drongos, who always want to believe they know what’s best and all about those ‘frameworks’, not to mention deliberately targetting 2-3% inflation, that make it all so boomy and busty.(assuming of course they’re not fooled by something as obvious as major demographic shifts, dictatorial currency manipulators, etc, etc) Still an Austrian skeptic? Why don’t you read between the lines of this scintillating insight into Glenn Stevens line of thinking, not to mention justification for those Reserve Board salaries –
http://www.news.com.au/business/story/0,27753,24310854-31037,00.html
As a learned bloke once said, the greatest threat to your wallet is-
‘This time it’s different’ followed by ‘We must do something’
Is it just me or are Fannie and Freddie the only example of a GSE in a mortgage industry anywhere in the western world?
If social democracies don’t have them, and even if more free market economies don’t have them, why would they exist in a market like America’s?
They are indeed an anomaly, OSO. But, as I’ve said in the updated post, I don’t think their odd status is centrally relevant. The monolines followed pretty much the same story.
Surely the takeover of F&F is more indicative of government failure given that their book was built and priced under an implicit government guarantee.
No improvement as yet in the language department:
The ‘originators’ of the action in question have named it “conservatorship”.
http://business.smh.com.au/business/us-takes-over-mortgage-giants-20080908-4blo.html
JQ – Your logic defies explaination. Socialism fails and you blame liberalism. Will wonders never cease?
[…] Quiggin declares the end of the neo-liberal project, in relation to the US’ nationalisation grab of the mortgage industry. Hoo-fucking-rah. Now […]
#12 and #14 you’re both missing the point here. The rescue of F&F is an indication that attempts to restore normal functioning of the financial system (in part by pushing F&F to take on risky loans from the private sector) have failed, and that the government will now have to act as an explicit guarantor of last resort.
No 3. “Given that a liberal, neo or otherwise, wouldn’t establish Freddie Mac or Fannie May in the first place, does this say anything about liberalism?”
The two bodies arose from the ashes of the savings and loan crisis in the US under George Bush senior in 1983. George Herbert was a bit less than a neo-con but in the Australian meaning of liberal I guess the answer Tom is yes.
pablo Says:
This just isn’t right. Fannie Mae was created in 1938, in the aftermath of the Depression. It was privatised in 1968. Freddie Mac was created in 1970 to provide competition with Fannie Mae.
Pablo, also note that ‘neoconservative’ has a different meaning to ‘neoliberal’.
SJ Yep, point taken. The S & L’s were also into home mortgages which led to my error. Apologies to George Herbert too.
TerjeP (say tay-a) wrote: “Socialism fails and you blame liberalism”
Socialism has supposedly been dead for decades and yet it is still apparently the cause of all the world’s problems.
It would be interesting to learn whether socialism also caused the Iraq War, Hurricane Katrina, the 2004 Tsunami, the 9/11 attacks, the Challenger and Columbia disasters, global warming and the last ice age.
‘More seriously, the significance of the event is not in the marginal change in the status of Fannie and Freddie from quasi-private to quasi-public, but in the abandonment of the pretence that the normal operations of financial markets are capable of cleaning up the mess they have created, even with the liberal helpings of public money that have already been dished out.” JQ
Not really, the Federal Reserve is putting up a whole $1 billion in equity and purchasing around $200 billion in mortgage-backed securities on market.
They’re still essentially treating the issue as one of mismanagement at two very large firms and the classic error of borrowing short and lending long.
The two companies have commodified and resold around $6 trillion in mortages. The plan is as you say eessnetially to put the Macs in run-off mode with around $600 billion in mortgages expiring each year.
Assuming a 5% deliquency rate and recovery of 50% of the outstanding amount, annual losses are likely to be around $7.5 billion a year, Those are pretty pessimistic assumptions BTW.
Apparently the Macs will continue to write soem new business but the really questions, it seems to me is who (if anyone) will take their place as the underwriter of US property values.
From a purely commercial perspective (such as that of the Fannie and Freddie shareholders) there’s probably some appeal to a good bank/bad bank split with a new freshly capitalised new company continuing to securitise asset (but presumably without even an “implicit” government guarantee).
I don’t know if that will be politically saleable however.
However this pans out, it’s probably going to be a lot more difficult (and more expensive) to get a mortgage in the US for the next decade or more.
There are perfect systems of government – just imperfect people to run them and a number of unintended consequences flowing from the fact that neo liberals are not very good at understanding human behaviour.
The assumption is that people will always behave in a rational manner to ensure long term viability to maximise long term profits. As the psychological test conducted on children where they are promised more lollies if they wait shows us, when left alone they go for the lollies in front of them almost every time. Many adults are also unable to control impulses for rewards now rather than hope that they come later.
The F&F saga seems somewhat similar where the advantages in credit given to the two organisations were kept rather than passed on to the borrowers for cheaper housing. The seeds of destruction were sown by those unable to wait and certainly those in charge of the lollies didn’t wish to share them.
The seven deadly sins including greed and avarice are often at work where if an individual can reap a reward despite its catasrophic effect on the larger system, they will do so. Government is the only organisation powerful enough to mitigate this effect but it is something of a lottery as to whether it can or will.
Jill Rush’s comments had me in mind of an earlier post containing a malicious statement by a retreating neolib that neoliberalism and social democracy were the same. After all this time? Why now?
They are opposites, if not extreme opposites as one would have with fascism and anarchism.
Neoliberalism is the begining of a swing of the pendulum to Selfish Individualism, as Eagleton decribes it, that finds its extreme expression in the meglomania of fascism; either psychotic Hitlerism or cold (state) Stalinism.
The tendency for Soc Dem would be to anarchism, but in the libertarian rather than egoist sense that leads from neoliberalism and makes it the basis for such a detestable and cold blooded ideology-a sort of doctrinal companion to the notion of the “Corporate Psychopath”.
But history and the species are not evolved to that point where people can preserve their individuality through cooperation; eg sublimation of ego.
Social democracy remains the civil default.
The last ice age was organised by disgruntled neoliberals. Otherwise your pretty close. 😉
Firstly the Iraq War. It was largely due to an excessive faith in the efficacy of big government.
Hurrican Katrina. Like the ice age the actual storm was caused by disgruntled neoliberals but all those houses were built there due to the effective federal insurance subsidy.
The 2004 Tsunami was an act of God. However God is probably a socialist.
The 9/11 attacks were orcastrated by would be Islamic socialists who want the world to convert to Islamic socialism under the one true socialist God. See point about 2004 Tsunami.
And both the Challenger and Columbia disasters would never have happened if NASA didn’t exist. And if NASA (big government agency wasting taxpayers money) isn’t socialism then I don’t know what is.
Now some may see some of this as a stretch. But then again some might see as a stretch the idea that neoliberalism is at an end because of Fannie and Freddie failing. Which in my book would make about as much sence as watching the Space Shuttle Challenger Disaster and asking if NASA has been engaging in too much neoliberalism.
In so far as the Fannie and Freddie disaster can be roped home to any political philosophy then I don’t think neoliberalism is the right one.
The supreme irony? The Chinese socialist government is now fretting about how much exposure they have to the US capitalist meltdown.
In mid-2007 China owned around $376 billion of debt issued by U.S. government agencies, principally Fannie and Freddie. Do they now walk away, or follow Uncle Sam down the hole? As one Chinese analyst frets:
“For China, whether or not you buy the new treasuries, there will be losses: if you buy them, you’re getting deeper in the hole; if you don’t buy, your existing holdings will lose value.”
Or as Vice-Premier Wang Qishan put it:
“If we don’t buy U.S. treasuries and ABS, what else we can buy? China just has no way to avoid the risks. Whatever we do, we have to bear the losses.”
http://www.guardian.co.uk/business/feedarticle/7781955
The old dictionary definitions of “Left” and “Right” just don’t seem to be holding up too well for discussion purposes in this Brave New World. Maybe it’s time to dump the corporate stock financial model?
God indeed, is “probably a socialist”. Read Sermon on the Mount, Dives and the Rich Man and the Money Chnagers, not to mention giving up your rich clothes and going on the road.
Paul,
God would (IMHO) not be a socialist. He is always careful, in His book, to emphasise that these should all be done on a voluntary basis. Donations and gifts are all meaningless and derive no merit if they are done compulsarily. If you want I can dig out some references.
Compulsion is the central tenet of any form of socialism. Without compulsion you have liberalism.
Re:
1. # 25
2. ” The “unknown idealâ€? of a perfect free market system remains pure and unsullied by empirical experience.”
From past posts I take it that the author of #25 agrees with the observation reproduced in 2. above.
This leaves the theoretical literature on ‘competitive private ownership economies’.
As I have mentioned in several posts before, since Radner (1972) it is known that theoretical models of ‘competitive private ownership economies’ with financial markets have different properties to that of otherwise identical models. Further, a crucial difference is that the economy is ‘unbounded’ (one loses the box in an Edgworth box diagram. I am referencing the latter for the non-economist readers: http://en.wikipedia.org/wiki/Edgeworth_box). This means something. This gives a clue.
I’ve also mentioned previously, that in the mid-1970s Oliver Hart provided conditions on an exchange economy version of the model for finding a solution without having a ‘box’ given by endowments.
If the author of #25 wants to have credibility then I say he should at least provide empirical evidence that the conditions in Hart are fulfilled (easier). In particular
a) that all ‘investors’ are strictly risk averse
b) that price expectations are not ‘too divergent’.
There is no doubt in my mind that the action of the US government regarding Fannie Mae and Freddie Mac, under whatever label, is a response to a type of ‘market failure'(systems failure).
To the extent that ‘neo-liberals’ refers to those who have ignored the topic of ‘market failure’ and acted on ‘faith’, I agree with JQ’s post.
#16 I’m not sure I am missing the point. F&F were both beasts of government. Their demise — if that is what we are seeing — is a failure of government. The US has been running dangerously erratic monetary policy, providing an effective government guarantee of mortgages, and passing madness like the Community Reinvestment Act. The credit markets have simply responded to incentives. To call the result of this meddling market failure requires some very odd logic.
#28. Since the government legislates, it is inevitable that the government is involved in any activity which is legal. The point is, what is the thinking (knowledge?) underlying the legislation.
Ernestine,
That is a touch counter-intuitive. There is a clear difference between a situation where the government legislates to make a particular activity illegal (or legal by exclusion) and where the government is actually a dealing counterparty, using the public purse to guarantee performance.
TerjeP (@ #25) wrote: “(The Iraq war) was largely due to an excessive faith in the efficacy of big government.”
Clearly you haven’t read “The Shock Doctrine”, have you?
On page 286, Naomi Klein quotes the speech by Donald Rumsfeld, the architect of the Iraq invasion:
That speech was made on 10 Sep 2001, the day before, as if on cue, the Pentagon was attacked by terrorists who flew a civilian aircraft into the building in which Rumsfeld had delivered that speech, or, so we are told.
After this Rumsfeld and his fellow neocons oversaw a program that saw the privatisation of many military functions previously the responsibility of Government, so that by the time that Iraq was invaded, much of the responsibility for conducting the war was in the hands of private contractors.
Whilst there may be some truly sincere neo-liberal purists, and you may be one, TerjeP, it seems to me that most who have espoused the neo-Liberal doctrine in past decades have been fully aware that their claims were garbage.
I don’t recall being warned, as Hayden, Fraser, Thatcher, Reagan, Hawke, Keating, Unsworth, Greiner, Kennett, Carr, Clinton, Bush, Rumsfeld, Cheney, Beattie, Iemma, Bligh, Costa etc, implemented various planks of what the rest of us thought was the neo-liberal program, that, in fact, socialism had been left intact and that, as a consequence, further economic calamity awaited us.
Don’t you think, TerjeP, that if the voices of the supposedly pure neo-liberalism that you claim to represent had prevailed all of these decades and told us that it had to be “all or nothing”, that the overwhelming public response would have been “why bother?”.
However, I doubt if what you are telling us now was said back then, and, if it was, then I certainly never noticed. Instead the public were told, at every step, that all the privatisations, deregulation, reduced taxes on the rich, removal of legislative protetions of workers’ entitlements, reduction on social welfare, cutbacks of government spending on social programs, removal of barriers to foreign investment, etc., etc., would lead to more prosperity overall and more prosperity to all.
Clearly these promises have not been fulfilled and our societies are still headed towards social, economic and ecological catastrophe that the free market ideologues insisted their policies would prevent. I think most informed people will rightly lay the responsibility for the calamities of recent decades, precisely where it belongs, that is with ‘market forces’.
Let’s hope that they soon come to understand the truth, that is, that economic neo-liberalism is barely more scientifically based than the religious dogma peddled to ordinary people in previous times in order to get them to accept socially iniquity. It was concocted by a bunch of unconscionable frauds, including Milton Friedman and Friedrich von Hayek, who met in 1947 at Mont Pelerin as described in George Monbiot’s How Did We Get Into This Mess? of 28 August 2007. As Monbiot wrote:
And I would have to concede they have done an excellent job. Even many suposedly left-wing intellectuals, who should have known better, were taken in by many of their claims.
Honestly, when Bush and Cheney are (implicitly) described as socialists, the word has lost all meaning.
I’d have to say that “neo-liberalism” is quite vague too.
“#16 I’m not sure I am missing the point. F&F were both beasts of government. Their demise — if that is what we are seeing — is a failure of government.”
F&F were privatised over 20 years ago. Saying their current problems are “a failure of government” is likely saying my current billing dispute with Sensis is “a failure io government”.
“…passing madness like the Community Reinvestment Act. ”
total lending under the CRA was minimal and it has little or nothing to do with the current mortgage crisis but hey I guess some peopl4e need a way to blame everything on those damn lib’rals and uppity “minorities”.
Ian, and when post-privatisation Telstra charged outrageous prices and stifled competition in broadband through it’s copper loop monopoly, did you blame the free market, or did you blame the Howard government from not properly undoing the monopoly previous governments created? Exactly.
BBB
Apostrophes are not my friend.
BBB
“Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn’t even apply to most of the loans that are behind it. As the University of Michigan’s Michael Barr points out, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA.
Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than twice the rate of the banks and thrifts. With this in mind, Yellen specifically rejects the “tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, “has increased the volume of responsible lending to low- and moderate-income households.” ”
http://www.prospect.org/cs/articles?article=did_liberals_cause_the_subprime_crisis
It’s also noteworthy that the CRA has been law since 1977 so if it caused the sub-prime crisis it did so at a snail-like pace.
BBB, think people will still be blaming Howard for contemporaneous problems with Telstra 20 years from now?
This perfect free market of which you speak sounds a bit like a Platonic Ideal. In my view, the only place for platonism is in pure mathematics, and even then it’s a bit of a stretch.
I will be Ian! If they had put the proper structural separation in place pre-privatisation, we’d all be a lot better off. It is of course much harder to change things now, which is not Rudd’s fault, but Howard’s (or perhaps more accurately, Minchin’s). But this is merely an example. The fact is that privatisation of the GSEs didn’t create a true free market anymore than selling Telstra off did.
BBB
And note that I am not arguing the case that this is all one massive government failure. I am simply saying that just because they became private many years ago, does not take government intervention out of the equation. Hence my Telstra example. I suspect we are both occupying the middle ground here, Ian.
BBB
#33 F&F were never really private because they were always underwritten by the government, it’s as simple as that.
I’m surprised to see there are still people prepared to apologise for the CRA and pretend that forcing banks to lend could’t possibly have anything to do with a buildup of bad loans. Apart from anything else it sits uncomfortably with the narrative of the credit crisis being caused by greedy banks forcing loans on unsuspecting poor people.
Even if you can believe that fantasy you still have to account for the incentive effect of the US government providing an guarantee on the majority of residential mortgages. This was an unbelievably stupid policy that led to a very predictable mis-pricing of credit and a nasty mess.
Given such a clear line of causation it is amazing to see people try to argue that this is a demonstration of large scale market failure and an argument for re-regulation. I guess if you want to believe something bad enough…
Joseph,
Add in the simple fact that the Basel I standards (the regulations the banks in the US still follow, as did we until the start of this year) effectively considered all home loans to have the same risk and you get a nasty mess.
Oh, and that the FDIC ensures that all banks have the same risk for depositors with less than $100K deposited – i.e. none.
The government has acted well to try to make large parts of the system risk free for everyone except the government. It is just as well that the system there is stable and works really well or you would wonder if all that government intervention is useful. Oh, wait…
Andrew,
*high five*
does an “implicit guarentee” count? for an actual guarantee you have to look for Ginnie Mae, not Fanny and Freddie, I believe. That’s the difference.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/08/05/BU1P124RP5.DTL
Of course, this assumption turned out to be quite reasonable. But the assumption itself was a function of a ‘free market’ that knew itself to be too big and important to fail, not of the government coming out and making any actual guarentee. Freddy and Fanny securities don’t claim to be backed by the “full faith and credit of the US Government”, unlike Ginnie Mae’s. Consequently Ginnie’s securities are properly regulated, unlike Freddy and Fannie’s, and it is not in the same mess that those companies are in now.
No Andrew Reynolds.
Compulsion is what you get when you have neoliberals overrunning places lke Iraq, to get at their wealth in the name of “restoring fredom”, or defending freedom from “terrorists” objecting to belonging to the billions forced to sponsor our “freedom” through the removal of THEIR freedoms through robbery, militarily by force, or through shonky and often coerced so-called “trade treaties”.
It is true Westerners certainly DO take advantage of their freedom “rights” to pointedly ignore the plight of 80% of the world’s usually exploited people. But we should not be deceived that the Compulsion that comes from police batons in third world puppet states cannot be traced back to “free” states like the US, France and Britain and their defence and intelligence organs.
Freedom, in the neo liberal sense, seldom applies to the “Other” and “rights” always are foregrounded against “obligations”,in this curious Nozickian view of life and human nature, as generosity seldom seems to overwhelm ingrained narcisssism, despite all the rhetorical waffle.
It is true that there are positive and negative freedoms. I just don’t understand why those of he Right are so little interested in the second concept.
paul, are these the neoliberals that are into fiscal deficits and massive expansion of the federal bureaucracy and security apparatus. Those ones? Yeah, not neoliberals. Go get a dictionary for Christ’s sake. Where on earth did this ‘neoliberal’ means ‘neocon’ or ‘Republican’ or ‘war-hawk’ rubbish come from? Oh, yeah, from the fact that sometimes supposed free marketers also start wars. So much for the intellectual nuances of Teh Left. Klein and her incoherent ramblings on this, referenced hilariously by daggett, aren’t helping here.
BBB