Coyote Blog

Well, we have upheld the ban on payday loans here in Arizona.

The payday-loan industry, which flourished this past decade on Arizonans' almost-insatiable need for quick, short-term loans regardless of their high interest rates, may have to close down in Arizona unless state lawmakers can be persuaded to ignore voters' wishes.

Voters last week overwhelmingly rejected Proposition 200, a ballot initiative financed and written by the loan companies to allow them to continue charging high interest rates on small loans. That decision placed Arizona among a growing number of states that have effectively shut down the payday lenders.

So, payday loans from company A to person B are really popular with both A & B, and the industry has "flourished."  But persons C, who don't participate in this market, have decided that, for their own good, A & B need to stop engaging in this behavior.  One such third party explains it this way:

Sen. Debbie McCune Davis, D-Phoenix, opposed Prop. 200 and has steadfastly fought payday lenders. She sees no need to let payday lenders continue to charge higher interest rates than other lenders.

Her and voter's actions have effectively limited payday loan companies to charging total interest and fees equivalent to no more than 36% annual interest.  OK, you say, this seems like a really high rate.  That should be enough, right?  Well, the problem comes with fixed costs and loan size.  Lets look at an example.

A typical payday loan size and term is about $400 for 18 days (pdf).  A typical fee for such a loan is $50, which includes both fixed costs and interest.  Wow, annualized that is 250%.  Usurious!  So would you personally go out and get a payday loan?  No way! And that is why voters vote to ban them - they are not good for me personally, so they must not be good for anyone else.

But here is the problem.  How do you maintain a storefront and trained people and all the documentation and collection apparatus for less than $50?  The same loan at 36% would allow a fee of only $7.20.  That barely even covers paying someone to originate the loan at the counter, much less pay interest and a risk premium.

Try going to the bank and getting a home loan or some other type of loan for only a $50 fee.  Granted those loans are more complicated, but in turn you will likely get charged hundred and probably thousands of dollars in fees.  There is a large fixed cost component to the act of lending which we tend to ignore on larger loans, but is there none-the-less.  In fact, just try to go to a bank and get a loan for $400 at all.  They don't make them, outside of the credit card industry, which solves this problem in part through economies of scale and in part through cost-shifting costs to merchants, options not really available to payday loan companies.

And so far, we are only talking about fixed costs, not the underwriting risk of extending loans to about any person who wanders in the door and can sign his/her name.  Anyone remember sub-prime mortgages?  Maybe there is a justification for large risk premiums, after all, on loans to under-qualified borrowers.  Particularly when you consider that most payday loan customers could not qualify even for a sub-prime mortgage.

The best equivalent to a payday loan offered by banks is overdraft protection, where the bank will go ahead and pay out on checks where there are insufficient funds, though they will charge a $20-$30 fee per check paid.  As you can see, these fees are very similar in magnitude to those charged by payday loan companies, particularly when you consider that these fees are generally charged on checks that average about $150.  Also, folks who get one overdraft fee usually get several in a row.  People are willing to pay these fees because they are in fact lower than the fees of actually having a check bounce, which can incur similar fees from merchants as well as hurting one's credit.

So, you just had to write three checks to get the power and water and telephone turned on, and you are pretty sure the money is not there in your checking account.  You are facing $80 in bounced-check (NSF) fees or overdraft fees.  Now might you consider a $400 loan for a $50 fee?  Well, probably the answer is still no, you would put it on your credit cards.  But everyone doesn't have credit cards, or doesn't qualify for them, or don't have a lifestyle that allows for them.  Where do they go, short of Tony Soprano?

Update: A reader sent me a link to this report, comparing payday loan rates to overdraft protection, and finding them of similar magnitude.  The author calculates an average $28.61 overdraft fee on an average $155 bounced check yields an APR of 478%.  There is a fixed cost to lending, and small very short term loans cost a lot of money, no matter how you get them.

I will remind folks not to be fooled by 18% or 23% rates on credit cards and set that as the market rate for small loans.  First, this misses annual fees for the cards.  But more importantly, it misses merchant fees.  Merchants pay between 2.5% and 3.5% of everything you charge to the credit card companies.  This helps to subsidize rates and, particularly, subsidize the fixed costs of small lending transactions.

Jack Tapper of ABC list all of the goodies promised by Obama in just one stump speech.  The list is really staggering, even more so than the usual political BS.  It is way to long to excerpt here.  There are so many outrageous ones, its hard for me to even pick a favorite.  But here are a few good ones:

"eliminate the oil we import from the Middle East in 10 years"

Uh, right.  We are going to completely eliminate half the fuel coming into the economy in 10 years.

"lower premiums" for those who already have health insurance;... "end discrimination by insurance companies to the sick and those who need care the most";

Perfect.  We are going to prevent insurance companies from dong any risk management, we are going to pile on even more "must cover" rules for all kinds of crap from acupuncture to mental health, and by doing so we are going to lower premiums.

This may be my favorite, though:

"reopen old factories, old plants, to build solar panels, and wind turbines"

LOL.  Barack is going to open some of those old GM plants in Flint, Michigan and build solar panels.  Seriously, is this a rhetorical flourish or does he really believe that factories are generic production facilities that can make anything, kind of like those little buildings you make in an RTS?

Update: And if you think that voters just discount all this stuff, don't miss this video of Obama supporters talking about the free gas and house she is going to get.

By the way, none of this will push me to vote for McCain.  McCain promises all kinds of crazy stuff too, its just less compelling stuff to voters.   He is not losing because he is promising less -- I think he is losing because Obama has a better grasp of what expensive shit people want to be promised than does McCain.

Us non-financial types are always learning something new.  After a lifetime of thinking that our economy rests on free markets, entrepreneurship, an educated and flexible labor force, risk-taking, etc., we suddenly find that everything depends on the TED Spread, a metric most of which most of us were blissfully ignorant 2 months ago.

The TED spread is basically the difference or spread between short term inter-bank loan rates and short term treasuries or T-bills.  It is in some sense a measure of perceived risk of lending to banks vs. (what are considered) low or near-zero risk US treasury obligations.  One way to think about it in the current market is how much extra would you need in interest to lend to your slacker brother-in-law Earl vs. say to Bill Gates.

Not surprisingly, the TED spread has shot up over the last few weeks, and it tends to be the #1 metric cited in declaring impending doom for the US economy.  But Alex Tabarrok looked at a longer view of the TED spread, and found this:

Now, the period from 1970-1983 were not by any means an economic glory period, but on the other hand its clear that TED spreads of the order of magnitude we have seen in the past weeks are not unprecedented by any means.

The problem I have with the TED spread is that higher recent spreads are being used as an indicator that credit has "dried up" and lending is at a standstill.  Why do I resist this conclusion?  Because of this chart:

So, gasoline prices rocketed from $1.50 a gallon to over $4.00 a gallon.  Does this mean that gasoline purchases have stopped?  Has the gasoline market closed up shop?  Of course not.  It just means the price went up.  It is absurd to show me a price chart, which is what the TED spread graph is, and infer from it changes in the underlying transaction volume.

In fact, when one looks at actual volume, of inter-bank loans or new commercial lending, there is not (at least yet) any of the drop-off everyone seems to assume exists.  For example:

The lesson I take from the numerous efforts to regulate/ban/demonize bottled water is that we have officially run out of real stuff to be worried about.  Seriously, when bottled water is the health and environmental risk of the decade, it is time to declare victory over Mother Nature.  More here.

I haven't posted at all on the brouhaha about mark-to-market accounting of derivatives and whether it was a contributor to the recent financial mess.  If I had to summarize the issue, I would describe it thus:  Investors want something more trustworthy than just management estimates of the value of complex securities -- so they would like an outside market-based reference point -- but the very complexity that makes these contracts hard to value as an outsider also tends to make their markets illiquid and volatile, making it difficult to get a good market value. 

Tom Selling addresses the problem of accounting for the value of credit default swaps here.  He makes what seems to me to be a common sense suggestion:

Requiring the asset and liability sides of derivatives to be separately
measured and reported seems like an amazingly simple fix that could
simplify regulation of the financial and insurance industries, reduce
the need for the disclosures in financial statements written so as to
discourage one from reading them, and help investors more easily assess
risk.

This certainly seems reasonable to me.  When one buys a revenue producing asset with debt financing, the two are listed separately as an asset and a liability, rather than as one "net" asset, even though they may be inextricably linked (say if the asset is collateral for the loan and the loan has high pre-payment penalties).  Any thoughts?  Does this make sense, or is it naive?

OK, I know burn-out is setting in.  I certainly think that explains, in part, why the House voted for a demonstrably worse bill than they voted against the week before.  But John Moore has a number links to an interesting set of charts from the Milken Institute on the financial meltdown.

They hit on many of the things I discussed earlier, but put a greater emphasis on 1) securitization, and the effect it had on good underwriting standards and 2) on interest rates as a driver of the housing bubble.

Update:  And an interesting post on the link between credit default swaps and short-selling.  My personal view is that credit default swaps will someday be looked at like earthquake insurance -- nice premiums today, but too much systematic risk, too much certainty that in 10 or 20 years there will be an event that forces nearly every policy to pay simultaneously, wiping out the insurer.  You can't get earthquake insurance, and you nearly can't get hurricane insurance, and I think the default insurance market may go the same way.  Or, as a minimum, the price is going so high few people will buy it.  This is not a market failure, it is a market lesson learned and adjustment to reality.

Update #2:  Even more from economists on the rush to bailout.

This is taken from and expanded from the end of this post.

Everyone involved in the bailout plan says, at least publicly, that they are not trying to bail out a bunch of Wall Street folks who lived high off the risk premium of these investments but now want to avoid the costs when the actual risks become clear.  They claim to be bailing out Wall Street and various large banks because they fear that a financial meltdown and liquidity crisis will starve main street businesses of cash, and create a deep economic slowdown.

OK, if this is the real policy goal -- to maintain the ability of main street businesses to borrow -- then here is my alternative proposal:

1. Immediately increase the SBA loan gaurantee authority by $100 billion dollars.  That is enough for a million new small business loans of $100,000 each.
2. Authorize treasury to spend up to X hundred billion to buy rated new issues of bonds and commercial paper of US non-financial companies.  Some limits should be applied - such as the feds cannot buy any more than 30% of a single issue and/or more than 10% of the entire outstanding debt of one company.

That's the plan.  Here are the advantages:

• The government is addressing the actual policy goal of keeping liquidity in main street business directly
• The government is investing in success, in main street companies trying to grow, and not in failed banks and financial institutions
• Moral hazard issues are avoided with financial institutions. 
• The SBA loan guarantees cost nothing today.  In fact, they are cash positive in the short term due to loan guarantee payments by borrowers.  Of course, they risk future losses,  but such losses in the future are in part covered by the guarantee payments, and a future loss is cheaper than a loss today.
• Investments in corporate bond issues are much easier to value, and are far less risky, than investments in illiquid mortgage securities.  The taxpayer is far less likely to take a beating on these purchases.
• Banks may still fail, but the FDIC has an infrastructure and experience for handling this.  If necessary to calm people, the FDIC could make a public commitment to assisted mergers to maintain all depositors.
• If there is some big financial meltdown, which I still doubt, there might be a need to inject some mortgage liquidity, but since the Feds now own Fannie and Freddie, the vehicle for doing so is easily available.

Update:  I was not clear -- this is actually an alternative to by alternative.  My first, preferred alternative plan is "do nothing."

I sat this weekend and pondered the pending financial bailout.  A number of fairly smart people who know more about Wall Street than I seem to think it a necessary evil, and this includes several folks who are nearly as libertarian as I.  Is a sort of knee-jerk libertarianism preventing me from accepting a necessary step to avert economic Armageddon?

I don't think so.  By the light of day on Monday morning, I still think it a bad idea.

Here is some of my thinking (to some extent my last point is the one that is most important to me -- if we want liquidity, let's put it in the right place).

• I am tired of businesses heading to the government bailout trough and arguing that the continued functioning not only of their industry, but of all the existing players in their industry, is critical to the health of the US economy and thus requires some sort of government subsidy/bailout/protection.  Coyote's first law of rent-seeking is that companies will always claim that failure of their business will have a disproportionately negative effect on the economy.  Coyote's first corollary to this law is that Congress usually accepts this argument at the exact point in time when it is no longer true.
• This bailout is even more grotesque than a normal industrial bailout.  GM can be said to have honestly tried to make the right cars, and just failed.  I don't like bailing them out, because I don't particularly like diverting capital into the hands of organizations that are proven failures at using capital well.  But the financial investors that we are bailing out today knew they were taking a lot of risk by purchasing risky securities and then leveraging them up on their balance sheets.  They lived high for years off of the fat returns for taking this risk, arrogantly explaining that they made lots of money because they were smarter than everyone else and because they were being rewarded for taking on risk.  But then they come running to the government when the returns on their risky securities turned south, which just makes me sick.  They were paid for taking this risk, so take it.  I am sorry that you have no cushion because all those earlier returns are already spent on Maserati's for your mistresses, but that is what chapter 7 is for.
• As many as 300,000 small businesses go bankrupt every year (this number is very, very hard to pin down, as it is hard to separate personal from business bankruptcy with small business).  Something like 299,998 of them do not get bailed out by the feds.  Why do the other 2 get special treatment vs. other US taxpayers?  Because they are better at lobbying Washington that they are essential?
• Yes, the government created the Alt-A and sub-prime mortgage markets,and caused them to flourish via Fannie and Freddie aggressively asking for and buying these loans.  And the feds, via tax policy, and local governments, via zoning, helped pump up the housing bubble.  But nothing forced private companies, particularly highly leveraged institutions like banks, to load up their balance sheets with these things, or, crazily, to write insurance policies on their value.  Libertarians want to use these government interventions as an excuse for the bailout, but it doesn't wash. I do think many banks reasonably have lawsuit material against ratings agencies Moodys and S&P, which is fine.  I think new blood in that business would be a very good thing.
• The total market capitalization of traded equities of public corporations on NYSE and NASDAQ is between $15 and $20 trillion.  That means that the first $150 billion of the bailout is equivalent to about a 1% price move on the exchanges, something that occurs almost every day.  Have we really close-coupled everything so tightly that a cumulative balance sheet hole on the order of magnitude of a 1% move on the stock market can bring down the whole financial system?  If so, we should just let the whole thing come down and rebuild itself in a more robust form.
• Wall Streeters pat themselves on the back all the time for how creative they are financially.  So get creative here.  Create some sort of new entity and have banks contribute toxic mortgages into the entity in exchange for equity.  Find some pension funds to invest in the new entity at a deep discount.
• These banks, who are experts in this stuff, claim they cannot value these failing, complex, illiquid mortgage packages.  OK, that may be true.  But how is the government possibly going to do any better?  Such a situation cannot possibly end well for the taxpayers. 
• I saw folks writing in fear last week that the commercial paper market might dry up.  The commercial paper market dries up all the time.  It comes back eventually.  People treat lending markets like they are charities or something, and they fear that lenders will give up and never come back.  But they are not charities.  They serve just as much of a purpose for lenders and for borrowers.  Businesses and folks with capital need to make money on short term cash.  They are not going to stop lending forever.  Even capital markets dry up from time to time.  The IPO market has disappeared several times, including several years in the post-Internet-bubble period. The junk bond market comes and goes.
• What is the government really worried about?  I presume that they are worried that liquidity will dry up and the ability of main street businesses to borrow will be impaired.  OK, then save the freaking $700 billion and if main street starts to have trouble borrowing, have the government participate somehow in that lending market.  Buy corporate bond issues, and/or increase the limit on SBA loan guarantees by a $100 billion  (this latter would allow a million new $100,000 SBA loans, and would actually generate money now in guarantee fees and only potentially cost money much later if the loans fail).  This way, we are investing liquidity in successful companies trying to grow rather than in failing banks that got us all into this.  Let's invest in success rather than in failure.

Saul Hansell at the NY Times has an interesting article about why risk assessment programs in investment banks were not sounding the alarm coming into the recent turmoil.  The article contains this gem:

Ms. Rahl said that it was now clear that the computers needed to
assume extra risk in owning a newfangled security that had never been
seen before.

"New products, by definition, carry more risk," she said. The models
should penalize investments that are complex, hard to understand and
infrequently traded, she said. They didn't.

I continue to see parallels between recent problems and the meltdown at Enron.  In fact, in many ways events in the natural gas trading market were a dry run for events in the mortgage market.   One filmmaker coined the phrase "Smartest Guys in the Room" to describe the hubris of the guys who ran Enron.  To some extent the phrase was absolutely true - I knew Jeff Skilling at McKinsey and he was indeed the smartest guy in the room.  But everyone can be wrong, and sometimes the smartest guys can be spectacularly wrong as they overestimate their ability to predict and control complex events.  I think this is a fair description of what went on in Wall Street over the past several years.

Via Carpe Diem, comes this September 30, 1999 NY Times story:

In a move that could help increase home ownership rates among
minorities and low-income consumers, the Fannie Mae Corporation is
easing the credit requirements on loans that it will purchase from
banks and other lenders.

The action, which will begin as a
pilot program involving 24 banks in 15 markets -- including the New
York metropolitan region -- will encourage those banks to extend home
mortgages to individuals whose credit is generally not good enough to
qualify for conventional loans. Fannie Mae officials say they hope to
make it a nationwide program by next spring.

Fannie Mae, the
nation's biggest underwriter of home mortgages, has been under
increasing pressure from the Clinton Administration to expand mortgage
loans among low and moderate income people and felt pressure from stock
holders to maintain its phenomenal growth in profits.

In
addition, banks, thrift institutions and mortgage companies have been
pressing Fannie Mae to help them make more loans to so-called subprime
borrowers. These borrowers whose incomes, credit ratings and savings
are not good enough to qualify for conventional loans, can only get
loans from finance companies that charge much higher interest rates --
anywhere from three to four percentage points higher than conventional
loans.

''Fannie Mae has expanded home ownership for millions of
families in the 1990's by reducing down payment requirements,'' said
Franklin D. Raines, Fannie Mae's chairman and chief executive officer.
''Yet there remain too many borrowers whose credit is just a notch
below what our underwriting has required who have been relegated to
paying significantly higher mortgage rates in the so-called subprime
market.''

Demographic information on these borrowers is
sketchy. But at least one study indicates that 18 percent of the loans
in the subprime market went to black borrowers, compared to 5 per cent
of loans in the conventional loan market.

In moving, even
tentatively, into this new area of lending, Fannie Mae is taking on
significantly more risk, which may not pose any difficulties during
flush economic times. But the government-subsidized corporation may run
into trouble in an economic downturn, prompting a government rescue
similar to that of the savings and loan industry in the 1980's.

''From
the perspective of many people, including me, this is another thrift
industry growing up around us,'' said Peter Wallison a resident fellow
at the American Enterprise Institute. ''If they fail, the government
will have to step up and bail them out the way it stepped up and bailed
out the thrift industry.''

Those heartless free marketing guys at the AEI -- always predicting doom every time we open our hearts to poor people.  Bailout?  What ridiculous scare-mongering.

I know that most non-financial folks, including myself, have their head spinning after this past few weeks' doings on Wall Street.  Doug Diamond and Anil Kashyap have a pretty good layman's roundup on Fannie/Freddie, Lehman, and AIG.  My sense is that their Lehman explanation also applies to Bear Stearns as well.  Here is just one small piece of a much longer article:

The Fannie and Freddie situation was a result of their unique roles
in the economy. They had been set up to support the housing market.
They helped guarantee mortgages (provided they met certain standards),
and were able to fund these guarantees by issuing their own debt, which
was in turn tacitly backed by the government. The government guarantees
allowed Fannie and Freddie to take on far more debt than a normal
company. In principle, they were also supposed to use the government
guarantee to reduce the mortgage cost to the homeowners, but the Fed
and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits
and squeeze the private sector out of the "conforming" mortgage market.
Regardless, many firms and foreign governments considered the debt of
Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly. 

Fannie and Freddie were weakly supervised and strayed from the core
mission. They began using their subsidized financing to buy
mortgage-backed securities which were backed by pools of mortgages that
did not meet their usual standards. Over the last year, it became clear
that their thin capital was not enough to cover the losses on these subprime
mortgages. The massive amount of diffusely held debt would have caused
collapses everywhere if it was defaulted upon; so the Treasury
announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government
would wipe out shareholders if it carried through with the guarantee),
no self-interested investor was willing to supply more equity to help
buffer the losses. Hence, the Treasury ended up taking them over.

Lehman's demise came when it could not even keep borrowing. Lehman
was rolling over at least $100 billion a month to finance its
investments in real estate, bonds, stocks, and financial assets. When
it is hard for lenders to monitor their investments and borrowers can
rapidly change the risk on their balance sheets, lenders opt for short-term lending. Compared to legal or other channels, their threat to refuse to roll over funding is the most effective option to keep the borrower in line.

This was especially relevant for Lehman, because as an investment
bank, it could transform its risk characteristics very easily by using
derivatives and by churning its trading portfolio. So for Lehman (and
all investment banks), the short-term financing is not an accident; it
is inevitable.

Why did the financing dry up? For months, short-sellers were
convinced that Lehman's real-estate losses were bigger than it had
acknowledged. As more bad news about the real estate market emerged,
including the losses at Freddie Mac and Fannie Mae, this view spread.

Lehman's costs of borrowing rose and its share price fell. With an
impending downgrade to its credit rating looming, legal restrictions
were going to prevent certain firms from continuing to lend to Lehman.
Other counterparties
that might have been able to lend, even if Lehman's credit rating was
impaired, simply decided that the chance of default in the near future
was too high, partly because they feared that future credit conditions
would get even tighter and force Lehman and others to default at that
time.

A.I.G. had to raise money because it had written $57 billion of insurance contracts whose payouts depended on the losses incurred on subprime real-estate related investments.
While its core insurance businesses and other subsidiaries (such as its
large aircraft-leasing operation) were doing fine, these contracts,
called credit default swaps (C.D.S.'s), were hemorrhaging.   

Furthermore, the possibility of further losses loomed if the housing
market continued to deteriorate. The credit-rating agencies looking at
the potential losses downgraded A.I.G.'s debt on Monday. With its lower
credit ratings, A.I.G.'s insurance contracts required A.I.G. to
demonstrate that it had collateral to service the contracts; estimates
suggested that it needed roughly $15 billion in immediate collateral.

A second problem A.I.G. faced is that if it failed to post the
collateral, it would be considered to have defaulted on the C.D.S.'s.
Were A.I.G. to default on C.D.S.'s, some other A.I.G. contracts (tied
to losses on other financial securities) contain clauses saying that
its other contractual partners could insist on prepayment of their
claims. These cross-default clauses are present so that resources from
one part of the business do not get diverted to plug a hole in another
part. A.I.G. had another $380 billion of these other insurance
contracts outstanding. No private investors were willing to step into
this situation and loan A.I.G. the money it needed to post the
collateral.

In the scramble to make good on the C.D.S.'s, A.I.G.'s ability to
service its own debt would come into question. A.I.G. had $160 billion
in bonds that were held all over the world: nowhere near as widely as
the Fannie and Freddie bonds, but still dispersed widely.

In addition, other large financial firms "” including Pacific
Investment Management Company (Pimco), the largest bond-investment fund
in the world "” had guaranteed A.I.G.'s bonds by writing C.D.S.
contracts.

Given the huge size of the contracts and the number of parties
intertwined, the Federal Reserve decided that a default by A.I.G. would
wreak havoc on the financial system and cause contagious failures.
There was an immediate need to get A.I.G. the collateral to honor its
contracts, so the Fed loaned A.I.G. $85 billion.

Update:  Travis has an awesome post with his own FAQ about what is going on.  Here is a taste:

Lots of financially naive folks think that we can remove all risk,
inflation, etc. by only ever trading apples for chickens on the barrel
head, and doing away with paper money (so that all money is gold) and
doing away fractional reserve banking, so that when I deposit one gold
coin in the bank, the bank can then take that actual physical gold coin
and loan it to someone else. It turns out that the friction involved in
doing things this way is so huge that the effect would make The Road
Warrior look like a children's bedtime story. You want to borrow money
to buy a car? The bank can't just loan money that's been deposited in
someone else's checking account - the bank has to get that person to
sign a note saying "yes, I understand that this money is on deposit
until that dude buying the card pays the bank back IN FULL". And the
lender, if he wants his money out ahead of time, is SOL. And even then,
there can be a flood, and your car gets totaled, and you get
Legionaire's disease, and you can't make the payments.

or this:

Now, for the next complication, let's also imagine that there are
300 million other people watching all of this, thinking "How bad is
this? Should I go down to the gun store, stock up on .223 and 12 gauge
shells, then stop by the veterinarians to see how much antibiotics I
can cadge before heading to the hills" ?

And the Feds really don't want 300 million armed folks heading
for the national forests, so they first try to tell everyone who owns a
bicycle "Hey, the value of your bike didn't really drop! It's still
worth $9!".

But no one wants to believe that.

So then they go to the guy who's writing insurance policies on
the value of bikes and they say "if you got $100 million, would that
calm things down a bit?".

While I am not happy to see a historic company go bankrupt, and have vague but unspecific worries about some kind of general cascading financial problem, I am happy to see the government let Lehman go bankrupt without any sort of special intervention or bailout for a number of reasons:

• Bailouts create awful incentives for other large companies managing their risk portfolios
• I know many small business people who have gone bankrupt, and I once lost my job in a company bankruptcy.  There is no reason Lehman equity holders and managers should be immune from the same process just because their company is large and old. 
• Lehman's management has failed to get a positive return from the assets in their care.  A bailout only keeps these assets under the same management.  A bankruptcy puts these assets in the hands of new parties who hopefully can do a better job with them. 
• I strongly suspect that the hole in Lehman's balance sheet from underwater assets like certain mortgages is large compared to its equity but small compared to its total assets.  If this is true, equity holders will end up with nothing, but most creditors should come out close to whole when everything is unwound.

Like Megan McArdle, I found Obama's recent reaction to the Lehman bankruptcy to be wrong-headed but unsurprising.  Obama is blaming recent financial problems on an overly laissez faire approach by GWB in general (LOL,that's funny) and a lack of strong enforcement by the SEC in particular. 

But one has to ask, what laws were not enforced?  My sense is that these are all perfectly lawful portfolios of mortgages in which the one mistake was systematically being too generous in giving out credit.  Mr. Obama's party has always been a strong advocate of pushing banks to be more generous with credit, particularly to the poor, and of promoting home ownership as a national goal.  If anything, financial institutions are struggling because they were too aggressive in these goals.  McArdle writes:

This was not some criminal activity that the Bush administration should
have been investigating more thoroughly; it was a thorough, massive, systemic
mispricing of the risk attendant on lending to people with bad credit.
(These are, mind you, the same people that five years ago the Democrats
wanted to help enjoy the many booms of homeownership.) Lehman, Bear,
Merrill and so forth did not sneakily lend these people money in the
hope of putting one over on the American taxpayer while ruining their
shareholders and getting the senior executives fired.  They got it
wrong.  Badly wrong.  So did everyone else.

It appears from further Obama statements talking about lack of enforcement for predatory lending laws that the Democrats want to get back on the rollercoaster of whipsawing banks between charges of redlining (you are not lending enough to the poor) and predatory lending (you are lending too much to the poor).

Postscript:  While in retrospect there may turn out to have been laws broken, in situations like this, particularly when a management team is trying to head off a liquidity crisis, these tend to be of the reporting and disclosure ilk.  We saw back during the Enron failure that people tend to assume law-breaking of some sort to be the cause of a major bankrupcy or collapse, and to satisfy this notion the government aggresively pursued Enron executives.  But nothing for which Enron was prosecuted had anything to do with their failure -- all the violations were about disclosure and accounting methodologies.  The company would have still crashed, probably faster, without these violations.

Update:  More here

Due to the very nature of political pressures as well as poor accounting, a lot of government services are provided to the public below their true cost or market clearing price  (there are exceptions, like intra-city mail, but in these cases the government must pass laws to prevent private competition in order to maintain its market share).  When the government provides these below-cost or below-market-price services, it tends to crowd out private options.  So I am wondering why Kevin Drum is so surprised:

I guess rescuing them was the right thing to do. I'm still a little
taken aback by the apparent fact that American banks are now almost
flatly unwilling to make mortgage loans unless they're backed by Fannie
or Freddie, but that seems to be the case whether it takes me aback or
not. So rescue them we must. I suppose my next question is whether it's
worth thinking about how to restructure the American home mortgage
industry so that it can operate efficiently even in the absence of
massive levels of government backup. Or is Fannie/Freddie style backup
just the way the world works these days and there's no point fussing
over it?

As evidenced by the current bailout (and their huge accretion in market share over the last several years), Fannie and Freddie were under-pricing the service they were providing.  So of course, all things equal, bankers will demand the Fannie/Freddie backing because that will be a more profitable product and will be less work for the banker.  This seems like a "duh" kind of thing.  Like the "mystery" of why in Massachussetts, while everyone is obligated to sign up for health insurance, only the ones who were eligeable for free coverage did so.

I have written before of a similar phenomenon in business loans, where loans with SBA backing have crowded out everything else out there, such that a small business really can't find a lender who will make small business loans except with SBA backing.  Bankers are people too, and they can get lazy.  They have come to rely on these government programs, but certainly the lending function would still exist in a robust form if these programs did not exist.  Bankers would have to find other risk-mitigation tools, or else the loans would be more expensive, reflecting that the banks could not get rid of all the risk and had to price that into the loan.

By the way, don't you love the technocratic hubris of "thinking about how to restructure the American home mortgage
industry so that it can operate efficiently even in the absence of
massive levels of government backup."  Why do I, or Drum, or anyone outside of banking have to think about this at all?  I don't personally know the best private alternative to government mortgage gaurantees.  So what?  The financial field has been rife with innovation over the last several decades.  Just remove the government backup and let the the banks figure it out.  And let them go bankrupt when they figure wrong.

Postscript: As an ironic aside, the bank that holds my SBA loans was closed by the FDIC last week, my guess is due to a bad mortgage book in the Las Vegas area.  This doesn't have a lot of impact on me except that as I have paid down my loans, they became wildly overcollateralized, and I was in the process of trying to renegotiate some of my collateral out of the deal.  That will have to be put on hold, I guess.

Update:  More on government crowding out private options, in an entirely different industry:

Basic
dental care in Britain is free to those under 16 or over 60, the
unemployed, students, military veterans and some low-income families.
For others, government dentists offer lower prices than private
practitioners.

However,
the government does not cover cosmetic dentistry, and a recent
reorganization of the way dentists work has prompted many to leave the
public sector. Katherine Murphy, a spokeswoman for The Patients
Association, an advocacy group, said it was proving increasingly
difficult for Britons to get anything beyond basic dental care from
Britain's National Health Service.

Update #2: More on Fannie and Freddie, again via Rick Perry:

The
Fannie Mae-Freddie Mac crisis may have been the most avoidable
financial crisis in history. Economists have long complained that the
risks posed by the government-sponsored enterprises were large relative
to any social benefits.

We
now realize that the overall policy of promoting home ownership was
carried to excess. Even taking as given the goal of expanding home
ownership, the public policy case for subsidizing mortgage finance was
weak. The case for using the GSEs as a vehicle to subsidize mortgage
finance was weaker still. The GSE structure serves to privatize profits and socialize losses.
And even if one thought that home ownership was worth encouraging,
mortgage debt was worth subsidizing, and the GSE structure was viable,
allowing the GSEs to assume a dominant role in mortgage finance was a
mistake. The larger they grew, the more precarious our financial
markets became.

It is an indicator of the power of the state that most CEO's of public companies feel the need to pay lip service to every politically correct trend that comes along and to engage in outright sycophancy every time they meet with politicians.  The reason, unfortunately, is that morons like Maxine Waters have been granted nearly unlimited powers over commerce.  Some CEOs unfortunately go even further, going beyond just humoring politicians to play the game themselves, engaging in outright rent-seeking for themselves and their shareholders.

So it is in this context that it is nice to see the CEO of Exxon-Mobil continuing in that company's traditions of not rolling over to populist political pressure:

Rex Tillerson, chairman and chief executive of Exxon Mobil Corp.,
the world's largest oil-and-gas company, came out swinging Wednesday
against the environmental movement, arguing the science of climate
change is far from settled and that his company views it as its
"corporate social responsibility" to continue to supply the world with
fossil fuels....

Avoiding the political correctness that many oil executives are now
showing on global warming, Mr. Tillerson called for a continuation of
the debate, rather than acceptance that it is occurring, with the
potential consequence that governments will implement policies that put
world economies at risk.

"My view is that this is so extraordinarily important to people the
world over, that to not have a debate on it is irresponsible," he said.
"To suggest that we know everything we need to know about these issues
is irresponsible.

"And I will take all the criticism that comes with it. Anybody that
tells you that they got this figured out is not being truthful. There
are too many complexities around climate science for anybody to fully
understand all of the causes and effects and consequences of what you
may chose to do to attempt to affect that. We have to let scientists to
continue their investigative work, unencumbered by political
influences. This is too important to be cute with it."

Mr. Tillerson said Exxon Mobil, despite its reputation as a staunch
climate change denier, is in fact close to the issue as the only oil
company that is a member of the United Nations Intergovernmental Panel
on Climate Change.

Exxon Mobil came under repeated attack during the rowdy meeting for
not showing leadership to combat global warming, with some arguing it
is putting shareholders' capital at risk by not moving into greener
energy.

Among the many critics who stood up in the city's Morton H. Meyerson
Symphony Centre, where the meeting was held, was Neva Rockefeller
Goodwin, the great-granddaughtger of John D. Rockefeller, who founded
Exxon's predecessor 125 years ago.

But her proposal to have Exxon Mobil prepare a report on the impact
of climate change on emerging countries and to embrace greener energy
was backed by only 10.4% of shareholders.

The Exxon shareholder meeting is a zoo.  LIttle serious work gets done.  There are about a zillion people who buy one share of stock so they can show up and flog whatever political hobby horse they have.  I do wish I had been there, though, so that in response to Ms. Goodwin's proposal I could have in turn asked for a report on how alarmist-proposed 80% reductions in fossil fuel consumption would have impacted poverty and progress in developing countries. 

A while back I had observed that Wal-Mart had passed Exxon as the left's #1 Satan.  It is good to see Exxon back on top. 

First it was breast implants, then thimerosal, and now it is phthalates.  Each have been attacked in turn by the junk-science / media / tort law complex.  Nobel Prize-winning chemist William Knowles wrote this week:

Lawmakers -- representing the concern of parents influenced by certain
environmentalists -- are calling for an outright ban of phthalates from
children's toys because of the misguided belief that by exposing
children to toys made with these chemicals we are putting their health
at risk.

Phthalates have a long history of attacks by environmental groups
dating back more than 30 years. Even then babies were of prime
consideration. Few chemicals have undergone such extensive testing and
survived as being safe. In fact, diisononyl phthalate, the most
commonly used phthalate in children's toys, has been subjected to more
than 200 tests....

Today, with no new scientific evidence, we are again challenging
phthalates as dangerous to babies and threatening to ban them. These
are products that have survived the toughest test of all, the test of
time. There is no evidence that babies or anyone else has ever been
harmed by them.

Eliminating phthalates from consumer products would be a true
challenge. Even more worrisome, however, is the notion that any
replacement would ever be able to pass the extreme scrutiny diisononyl
phthalate and other phthalates have.

There is nothing wrong with examining the products our children
come into contact with to be sure they pose no health risks. However,
in this case, it would be a great mistake to ban what has been proven
to be a benign product without some further scientific evidence.

Remember Y2K?  If you took the media and politicians seriously, this sure did seem like it was going to big a big apocalyptic deal (see survey in the postscript about economic depression and civil insurrection).  Until it wasn't.

Odd Citizen points to an interesting study on this topic.  The author links this
Australian study looking retrospectively at the Y2K scare, trying to understand
why an irrational collective hysteria developed that allowed for no skepticism
(seem familiar).  The whole thing is interesting, but here is the money
quote:

From the perspective of public administration, the two most
compelling observations relate to conformity and collective amnesia. The
response to Y2K shows how relatively subtle characteristics of a policy problem
may produce a conformist response in which no policy actors have any incentive
to oppose, or even to critically assess, the dominant view. Moreover, in a
situation where a policy has been adopted and implemented with unanimous
support, or at least without any opposition, there is likely to be little
interest in critical evaluation when it appears that the costs of the policy
have outweighed the benefits.

The article is written without any reference to current
climate issues, but wow, does this sound familiar?  It is a dead-on description of what is occurring with global warming. 

The author also goes on to discuss public choice theory and why it is not necessarily a good explanatory model for the Y2K scare.  He argues that a better explanation was the asymmetry of blame:

Individuals and groups who argued for a 'fix on failure' approach stood to benefit only modestly if this approach avoided unnecessary costs, but faced the risk of blame in the event of significant system failures attributable (accurately or otherwise) to Y2K related problems. Conversely, it was evident in advance that there was little risk of loss to individuals who advocated comprehensive remediation. The absence of any serious Y2K problems could always be attributed to the success of the remediation program.

The asymmetry of incentives was amplified by the possibility of litigation, particularly in the United States and, to a lesser extent, in other English-speaking countries. The reliance of the United States on tort litigation as a method of compensating those experiencing adverse outcomes of various kinds produces a strong bias in favour of 'defensive' expenditures. In particular, jurors have been highly unsympathetic to individuals and organisations that have chosen to disregard known low-probability risks.

The special characteristics of the Y2K problem were ideally suited to produce this kind of reaction. On the one hand, the problem was both widespread and comprehensible to non-experts, such as potential jurors. On the other hand, if 'embedded systems' are disregarded, the Y2K problem differed from most other computer 'bugs' in that a complete solution was feasible, though very expensive.

In these circumstances, litigation against organisations that had failed to undertake comprehensive Y2K remediation, and experienced any form of system breakdown in early 2000, was virtually guaranteed of success. By contrast, the risk of blame being allocated to organisations that overspent on Y2K remediation was perceived to be minimal. The absence of litigation or other processes for the allocation of blame in the aftermath of the Y2K non-event shows that this perception was accurate.

A rough parallel to this in the global warming world is the apparent ease of assigning blame for CO2 emissions to energy producers and car manufacturers (despite the fact that it is all of us who uses this energy and buys these cars) vs. the reluctance of media and others to quantify and assign blame for reductions in wealth and economic prosperity that might result from CO2 limitations.

Postscript:  One other thing that is interesting to me as a libertarian:  I often point out that the political parties are a joke, a mish-mash of shifting political positions that has little to do with deeply held theories of government and more to do with branding and populist electioneering.  The Y2K-Climate comparison caused me to find a good example.  In 1999, it was the Republicans using the Y2K issue as a club on the Democrats, arguing that the Clinton Administration, and Al Gore in particular, were ignoring this critical end-of-the-world crisis and that the government needed to be doing more.  Really.  Just check this out from Dec, 1999:

Last year, The National Journal devoted an entire issue to the subject, with headlines such as "The Big Glitch" and "Sorry, Al, This Bug's for You." In the special issue, Neil Munro cites a survey of industry and government executives and
programmers concerning potential fallout from the millennium bug, showing that 70 percent
anticipated a negative effect on the economy, with 10 percent of respondents not ruling
out the possibility of economic depression and civil insurrection.   

With a technology problem of this magnitude on the national horizon, where was the leadership of the nation's No. 1 techno-nerd and self-proclaimed creator of the "information superhighway," Vice President Al Gore?   

Gore's familiarity with and personal interest in technology, specifically computer technology, makes suspect his long silence on the Y2K issue.   

In his biography, "Gore: A Political Life," Bob Zelnick writes that Gore "had nothing to say during the first five-and-a-half years of his vice presidency
about the biggest problem in the history of high-tech America."

Let the record show that I was a Y2K skeptic before I was a climate skeptic.

I may be making common cause with some Republicans on the climate issue at the moment, but I don't trust them.  In fact, already we see McCain jumping on the climate bandwagon (as he does with every populist issue -- he believes in nothing) and I have a strong sense GWB may dive into the climate fray quite soon.

While I find the torture recommendations in John Yoo's memos awful, they worry me less than the general assumptions embodied in them about presidential power.  After all, the issue of allowable tortures is a narrow issue that can be dealt with efficiently through Congressional legislation, and is almost certainly something to be disavowed by the next administration.

Based on historical precedent, what is less likely to be disavowed by the next administration are the broader definitions of presidential power adopted by GWB.  It is in this enhanced theory of presidential power where the real risk to the nation exists, and, unfortunately, there are all too few examples since George Washington's declining to run for office a third time of president's eschewing power.  Already, folks on the left are crafting theories around using the imperial presidency to address their favored issues, such as the University of Colorado's proposal for implementing greenhouse gas controls by executive fiat.

I mentioned yesterday that, consistent with our perfect 15 for 15 history of having sick kids on the family vacation, I missed a day of skiing to take care of my sick son.  Well, the other shoe dropped today, and my wife missed a day of skiing with my sick daughter.  Fortunately, we only have two kids so we may all ski tomorrow.

By the way of disclosure, I enjoy the fun my family has skiing but it really is not my favorite activity or even in my top 50 or so activities.  Too cold, too much stuff to bring, too expensive, too many lines.  Like having to buy $1000 of equipment to go to Disney World and finding that they moved it to Alaska.  With the added risk of breaking a leg.

The likely Republican presidential nominee is well to the left of the last Democratic president on economic issues.  And George McGovern sounds Laissez Faire:

Under the guise of protecting us from ourselves, the
right and the left are becoming ever more aggressive in regulating
behavior. Much paternalist scrutiny has recently centered on personal
economics...

Since leaving office I've written about public
policy from a new perspective: outside looking in. I've come to realize
that protecting freedom of choice in our everyday lives is essential to
maintaining a healthy civil society.

Why do we think we are
helping adult consumers by taking away their options? We don't take
away cars because we don't like some people speeding. We allow state
lotteries despite knowing some people are betting their grocery money.
Everyone is exposed to economic risks of some kind. But we don't
operate mindlessly in trying to smooth out every theoretical wrinkle in
life.

The nature of freedom of choice is that some people will
misuse their responsibility and hurt themselves in the process. We
should do our best to educate them, but without diminishing choice for
everyone else.

Really, its that George McGovern.

And David Mamet questions the power of government:

And I began to question my hatred for "the Corporations" - the
hatred of which, I found, was but the flip side of my hunger for those
goods and services they provide and without which we could not live.

And I began to question my distrust of the "Bad, Bad Military"
of my youth, which, I saw, was then and is now made up of those men and
women who actually risk their lives to protect the rest of us from a
very hostile world"¦

But if the government is not to intervene, how will we, mere human beings, work it all out?

I wondered and read, and it occurred to me that I knew the
answer, and here it is: We just seem to. How do I know? From
experience"¦

Strand unacquainted bus travelers in the middle of the night,
and what do you get? A lot of bad drama, and a shake-and-bake Mayflower
Compact. Each, instantly, adds what he or she can to the solution. Why?
Each wants, and in fact needs, to contribute - to throw into the pot
what gifts each has in order to achieve the overall goal, as well as
status in the new-formed community. And so they work it out.

And so I, like many of the liberal congregation, began, teeth
grinding, to attempt to do so. And in doing so, I recognized that I
held those two views of America (politics, government, corporations,
the military). One was of a state where everything was magically wrong
and must be immediately corrected at any cost; and the other - the
world in which I actually functioned day to day - was made up of
people, most of whom were reasonably trying to maximize their comfort
by getting along with each other (in the workplace, the marketplace,
the jury room, on the freeway, even at the school-board meeting).

And I realized that the time had come for me to avow my
participation in that America in which I chose to live, and that that
country was not a schoolroom teaching values, but a marketplace"¦

Megan McArdle has a good post and excerpts from Adam Shepard, who set out with $25 to see how hard it was to escape from poverty.  I won't re-quote that post here, you should see her site, but I wanted to comment on one thing Shepard says about his early days trying to convince supervisors they should hire a homeless guy:

So, he gave me the secret. To paraphrase, he told me to go to these
managers and tell them who you are, that you are the greatest worker on
the planet and that it would be a mistake not to hire you. If they take
you on, great. If not, move on down the line. By day's end, you're
gonna have a job.

So I did. The next day, I went to see Curtis at Fast Company, a
moving company where I'd already applied. "Curt!" I said. "I'm Adam
Shepard, and I'm the greatest mover on the planet. It would be a
mistake for you not to hire me." He looked at me across the table and
smiled, knowing I was lying like hell to him. But he liked my attitude
"“ especially after I offered to work a day for free "“ so he hired me on
the spot.

This is very normal -- if you want someone to take a risk, you try to reduce the cost for him.  Not sure you want to try our product?  We'll give you a free sample.  In this case, he agreed to work for free to convince the manager he was a good worker.  This makes sense -- to emerge from homelessness and to get a job with no skills and no work history, one needs to be willing to give a bit of a discount on your labor, at least at first, to get someone to give you a chance.

But here is the interesting part -- the arrangement Curtis and Adam Shepard made is ILLEGAL.  The Fair Labor Standards Act, which includes Federal minimum wage law, does not allow Curtis to accept unpaid labor and does not even allow Mr. Shepard to offer it.  The fact that the deal makes so much sense and it so clearly is in the mutual best interest of both parties is absolutely irrelevant under the law.  Fast Company could be busted, should the DOL choose to focus its attention their way.

When people argue that the minimum wage is most harmful to the poor, because it prices the first rung of the labor ladder beyond what their minimal skills can justify, this is what they mean.

I had a friend in the consulting business that used to joke that he preferred to only have one data point when he had a point he wanted to make.  "If you only have one data point, you are free to slam a line through it in any direction and at any slope you want.  Once you have two, you are more constrained."

I am reminded of that story reading Trevor Butterworth's fabulous take down of typically bad media "science" scare story, this one on fireproofing materials in mattresses.  He has a lengthy fisking, but concludes:

What CBS produced is an advertorial for ABC Carpets and Homes, more
suited to a shopping channel. By failing to test any of the claims for
a risk against the science, by using a sample of one self-diagnosed
couple, by testing nothing, and not even bothering to interview someone
from the CPSC, let alone an independent toxicologist, the viewer is
left with the message: buy a bed at ABC if you want to be safe.

I am all for full legalization of gambling, but, at the risk of preaching at you, if you are betting one of the following Superbowl prop bets with any kind of cash, you might have a gambling problem.  Here are several examples from Sports Book Review:

What song will Tom Petty open with?
Petty is this year's halftime entertainment in
Glendale; FOX advertised this fact during previous NFL games using
"Runnin' Down a Dream" off the 1989 album Full Moon Fever. That's a
strong indicator the song will at least be part of what will be a short
set, although a medley like the one Prince performed last year is
certainly possible.

"Runnin' Down a Dream" is the favorite at +110, followed by the 1977 classic "American Girl" at +175.

Color of liquid winning head coach is doused in?
Football lore has it that Bill Parcells got the first Gatorade shower
in 1985, courtesy of Jim Burt and Harry Carson, when the Giants beat
the Washington Redskins
17-3 during a midseason game. The Gatorade was orange (+200), as it was
when Parcells took a bath after winning Super Bowl XXI. But Bill
Belichick was doused in a clear liquid (+300) after winning Super Bowl
XXXIX over the Eagles.

Halftime commercial to have highest rating
Budweiser is the big favorite at "“180, followed by godaddy.com at +275.
Last year's winner was a commercial by Hewlett-Packard; the Bud Light
ads didn't even crack the Top 3. So Anheuser-Busch has reportedly taken
out nine (!) Super Bowl ads this year; Bud should be the value pick
here by sheer volume alone.

Length of National Anthem
American Idol winner Jordin Sparks will sing the
Star-Spangled Banner at Super Bowl XLII, presumably because FOX is the
television host for both programs. The over/under for this prop is
103.5 seconds. Sparks took about 102 seconds to complete the anthem at
Game 1 of the 2007 NBA Finals between the San Antonio Spurs and the Cleveland Cavaliers.

Here are a few others I found at this site, with all the prop bets you could ever wish for:

2008 Super Bowl XLII Props - First offensive lineman called for a holding penalty.
Chris Snee (NYG)
David Diehl (NYG)
Grey Ruegamer (NYG)
Kareem McKenzie (NYG)
Shaun O'Hara (NYG)
Dan Koppen (NE)
Logan Mankins (NE)
Matt Light (NE)
Nick Kaczur (NE)
Rich Seubert (NE)
Stephen Neal (NE)
Field (Any Other Player)

Who will the MVP of the Game thank first?
Teammates
God
Family
Coach
Doesn't thank anyone

We must be a secular society - God's fallen to third.  I always wanted to see someone from the losing side get interviewed right after the winner thanked God for their win.  Wouldn't you just love the losing player to say "Well, you heard it.  God was against us.  What chance did we have?"

Maxed Out Mamma tells us that Fannie Mae may already have huge subprime exposure (emphasis added):

Maybe most voters believe
that FNMA and FHA are just in the conservative loan business.
HAHAHAHAHAHAHAHA. Certainly no "trained journalist" is going to ask any
questions about this topic.

Both Fannie and FHA will go to DTIs of over 60% in some cases. Especially refis. Try this thread on FHA.
If only I had saved down the 100 odd links or so I've run into over the
last year about how brokers were getting loans that the subprime
companies refused (who have since defaulted) through under FNMA!!! The
reason they did it as a last resort was only because FNMA paid less for
the loan. FNMA is already going to run into huge problems because of
the slopover into their portfolio in the interim between most of the
subprime lenders going down and FNMA's meaningful tightening of lending
standards. So FNMA already faces years of worsening financial trouble
without any new risks. Why does OFHEO oppose this? Hmmmm?

You can get information on Fannie's loan types at efanniemae.com. Believe me, they do high LTV, hybrids, 40 year etc. This page will show you information about Fannie's ARM products. Take a look. Take a good look. You want a 100% interest-only? They got it!! In fact, they'll take downpayment assistance, and go up to 105% with special programs. Chortle! Ya want interest-only ARM hybrids with DAP? Sure. BRING IT ON, cries Fannie. Simultaneous seconds? Sure 'nuff!!! (By the way, this is the escape from the refusal of the MI companies to play.)

The
bottom line is that every risk afflicting Alt-A lenders in high-cost
areas can afflict Fannie and really has. It's just that no one is
paying attention.

Those who oppose more open immigration generally have three arguments, to which I have varying levels of sympathy:

• It's illegal!  Illegal immigration violates the rule of law.  I have always thought this argument weak and circular.  If the only problem is that immigrants are violating the law, then the law can be changed and its now all legal.  Since this is not the proposed solution, presumably there are other factors that make more open immigration bad beyond just the fact of its illegality.  I am positive I could come up with hundreds of bad laws that if I asked a conservative, "should I aggressively enforce this bad law or should I change it," the answer would be the latter.
• We will be corrupting our culture.  I am never fully sure what these arguments mean, and they always seem to carry a touch of racism, even if that is not what is intended.  So I will rewrite this complaint in a way I find more compelling:  "We are worried that in the name of liberty and freedom, we will admit immigrants who, because of their background and culture, will vote against liberty and freedom when they join our democracy."  I am somewhat sympathetic to this fear, though I think the horse may already be out of the barn on this one.  Our current US citizens already seem quite able to vote for restrictions on liberties without any outside help.  If I were really worried about this, I might wall off Canada before Mexico.
• Open Immigration or Welfare State:  Pick One.  I find this the most compelling argument for immigration restrictions.  Historically, immigration has been about taking a risk to make a better life.  I have been reading a biography of Andrew Carnegie, which describes the real risks his family took, and knew they were taking, in coming to America.  But in America today, we aren't comfortable letting people bear the full risk of their failure.  We insist that the government step in with our tax money and provide people a soft landing for their bad decisions (see:  Mortgage bailout) and even provide them with a minimum income that in many cases dwarfs what they were making in their home country. 

My problem with conservatives is that they are too fast to yell "game over" after making these arguments, particularly the third.  There are some very real reasons why conservatives, in particular, should not so easily give up on finding a way to allow more free immigration.  Consider these questions:

• Should the US government have the right and the power to dictate who I can and cannot hire to work for me in my business?
• Should the US government have the right and the power to dictate who can and cannot take up residence on my property (say as tenants)?

My guess is that many conservatives would answer both these questions in the negative, but in reality this is what citizenship has become:  A government license to work and live in the boundaries of this nation.

I can't accept that.  As I wrote here:

The individual rights we hold dear are our rights as human beings, NOT
as citizens.  They flow from our very existence, not from our
government. As human beings, we have the right to assemble with
whomever we want and to speak our minds.  We have the right to live
free of force or physical coercion from other men.  We have the right
to make mutually beneficial arrangements with other men, arrangements
that might involve exchanging goods, purchasing shelter, or paying
another man an agreed upon rate for his work.  We have these rights and
more in nature, and have therefore chosen to form governments not to be
the source of these rights (for they already existed in advance of
governments) but to provide protection of these rights against other
men who might try to violate these rights through force or fraud....

These rights of speech and assembly and commerce and property
shouldn't, therefore, be contingent on "citizenship".  I should be
able, equally, to contract for service from David in New Jersey or Lars
in Sweden.  David or Lars, who are equally human beings,  have the
equal right to buy my property, if we can agree to terms.  If he wants
to get away from cold winters in Sweden, Lars can contract with a
private airline to fly here, contract with another person to rent an
apartment or buy housing, contract with a third person to provide his
services in exchange for wages.  But Lars can't do all these things
today, and is excluded from these transactions just because he was born
over some geographic line?  To say that Lars or any other "foreign"
resident has less of a right to engage in these decisions, behaviors,
and transactions than a person born in the US is to imply that the US
government is somehow the source of the right to pursue these
activities, WHICH IT IS NOT...

I can accept that there can be some
minimum residence requirements to vote in elections and perform certain
government duties, but again these are functions associated with this
artificial construct called "government".  There should not be, nor is
there any particular philosophical basis for, limiting the rights of
association, speech, or commerce based on residency or citizenship,
since these rights pre-date the government and the formation of borders.

I have advocated for years that the concept of citizenship needs to be unbundled (and here, on the Roman term Latin Rights).   Kerry Howley makes a similar argument today:

Citizenships are club memberships you happen to be born with. Some
clubs, like the Norway club, have truly awesome benefits. Others, like
the Malawi club, offer next to none. Membership in each club is kept
limited by club members, who understandably worry about the drain on
resources that new members might represent. Wishing the U.S. would
extend more memberships in 2008 isn't going to get you very far.   

Conceptually,
for whatever reason, most of us are in a place where we think labor
market access and citizenships ought to be bundled. A Malawian can't
come work here, we think, without the promise of a club membership,
which is nearly impossible to get. This is an incredibly damaging
assumption for two reasons: (1) memberships are essentially fixed in
wealthy democratic societies (2) uneven labor market access is a major
cause of global inequality. Decoupling the two leads to massive gains,
as we see in Singapore, without the need to up memberships.   

Here's
another way to think about it: Clubs have positive duties toward their
members, including those of the welfare state. But the negative duty
not to harm outsiders exists prior to clubs, and denying people the
ability to cooperate with one another violates their rights in a very
basic way. Our current policy is one of coercively preventing
cooperation. In saying "we can't let people into this country unless we
confer upon them all the rights and duties of citizenship," you are
saying that we need to violate their right to move freely and cooperate
unless we can give them welfare benefits. But that's backwards.

The Democrats of late seem to be pining for the "Ward Cleaver" economy of the 1950's, lamenting that a) the middle class is worse off today financially, b) it takes two income earners to "survive" today rather than one and c) the middle class faces more risk without any additional reward.  Rather than refute all this mess in detail yet again, I will leave you with this quiz, via TJIC, from Tamara K:

1) The balance on Ward Cleaver's three most frequently used credit cards is?

2)
Does Wally have an Xbox3 hooked to a flatscreen TV in his room, or is
he making do with an old Play Station hooked to a hand-me-down 19" Sony?

3)
In addition to electricity, water, and the telephone, the Cleaver's
largest monthly bill is: a. Cellular Service, b. Cable TV, c. Broadband
Internet Access, or d. Late Fees At Blockbuster.

4) The Cleaver's timeshare is in: a.) Destin, or b.) Gatlinburg.

5) June's bread maker was made by: a.) Sunbeam, or b.) Krupps.

6)
The amount of money Ward loses annually playing Powerball, Online Slots
at home, and Texas Hold 'Em on vacation in Branson, Missouri is: $____
(Round to the nearest dollar.)