December 18, 2007
Quasi-fiscal scoundrels, Part 2
Alan Greenspan is right (for once). He recently made the obvious but important and oft-conveniently-forgotten point, that the least harmful way of intervening to help US homeowners saddled with mortgages they cannot afford when the early teaser rates on their mortgages re-set to much higher levels, is to give them direct financial aid. This is the opposite of what Treasury Secretary Hank Paulson is peddling. Paulson proposes an interest rate freeze on some subprime loans, preventing the teaser rate resets for five years. Greenspan’s statement was very much to the point: "It’s far less damaging to the economy to create a short-term fiscal problem, which we would, than to try to fix the prices of homes or interest rates".
Paulson dismissed Greenspan’s argument that it would be better to provide cash aid to homeowners than freeze rates on subprime loans. “I don’t think what we need is a big government bail-out”. The Greenspan - Paulson argument pits the economics of Ann Raynd and Milton Friedman against those of Jozef Stalin and Hugo Chavez. Raynd & Friedman win.
I argued in an earlier contribution on the US Treasury proposal for a quasi-fiscal bail-out of some of the US subprime mortgage borrowers, that there were two things wrong with Paulson’s proposal.
First, there is no valid argument based on poverty relief or on fairness/distributive justice, for bailing out subprime mortgage borrowers. They borrowed imprudently and took on home loans larger than they could afford. They should live with the consequences. There are many Americans who are poorer than these financially challenged subprime borrowers, but who won’t get a dime of financial relief in their Christmas stockings from uncle Sam. This includes the countless homeless in the US - those who have no roof over their head of any kind, owner-occupied or rented. If the government wishes to help the poor, it ought to do so on budget. Even if some of those who imprudently took on subprime loans are now threatened with the loss of their homes, or even with poverty, this is no reason for rewarding and subsidising this particular form of imprudence. There should be proper assistance and relief for all the poor, but no special aid ‘pots’ for those who are threatened with poverty because of their own greed and ignorance. That would be both unfair and incentive-corrupting.
If there was mis-selling of subprime mortgages to unsophisticated borrowers and if this amounted either to negligence by the originators or to deception or fraud, the civil or criminal courts are the places to deal with these matters.
The same no bail-out argument applies to institutional borrowers like banks and other financial institutions also, and not only in the US. Keeping Northern Rock and its shareholders afloat at taxpayers’ expense/risk is an inexcusable misuse of UK public funds to avoid political embarrassment.
Second, if despite the previous argument you are going to engage in a government bail-out, do it openly, transparently and on-budget, through explicit cash payments to designated beneficiaries. Without the truth, there can be no accountability. Don’t hide the fiscal reality of a tax on the subprime mortgage lender and a cash payment to the subprime mortgage borrower, behind a government intervention in the price mechanism - a prohibition of re-sets of teaser rates to the new scheduled higher levels.
The US Treasury proposal combines the transparency-enhancing miracle of off-budget and off-balance-sheet financing with the incentive-improving subtleties of Soviet central planning. It deserves a swift, disrespectful burial.
Ayn Rand, Willem
Posted by: jon m | December 18th, 2007 at 10:03 pm | Report this commentps not that I have read her, either –impossibly turgid
Posted by: jon m | December 18th, 2007 at 10:06 pm | Report this commentIn his paper, Gold and Economic Freedom, published in Ayn Rand’s book, Capitalism: The Unknown Ideal, Alan Greenspan writes “As the supply of money (claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds for the government bonds financed by bank credit expansion.”
Posted by: Doug Wolkon - Author of The New Game | December 18th, 2007 at 11:37 pm | Report this commentBy gratuitously linking Hugo Chavez with Stalin, Mr Buiter reveals himself as a silly analyst.
Posted by: cristobal senior | December 19th, 2007 at 12:08 pm | Report this commentNever mind that Hugo Chavez is acknowledged by the whole world as one of the most vibrant democrats in the present times. But this is typical of the self-described “libertarians” who always show a profound immaturity and childness of severe proportions. This is totally unbecoming of some one supposed to be in academics.Poor students.
As typical of Randians his arguments are to tally flawed: to claim that the borrowers should’ve known better is to suppose: 1 perfect knowledge +expertise on their part. 2- That, in a fallacy typical of libertarians, there exists an equality of power among sellers and buyers/ 3- Never mind that the power of an agressive campaing of mortgage selling directed to seduce the minds even of a robot was unleashed with ferociousness upon the population. 4- Never mind that it is not the unqualified mortgage borrowers who are the source of the crisis but the financial power houses’ thirst for higher returns.
Finally to call people “greedy” because they are looking to satisfy one of the most basic human needs : that of shelter, implies a shocking state of psychic numbness that questions the humanity of Mr Buiter.
Of course, for him, such a concept as the Public Good does not exist. Well,I imagine he spends his afternoons seeping tea with that comrade of his who once said: “there is not such a thing as society but only individuals” Actually Adolf Hitler said it first.
Cristobal Senior
NYC
Re: Comment by jom n
Quite right. Apologies for sloppiness. Cannot even claim dyslexia rules KO.
Posted by: Willem H. Buiter | December 20th, 2007 at 12:10 am | Report this commentRe: Comment by jom n
Quite right. Apologies for sloppiness. Cannot even claim dyslexia rules KO.
Posted by: Willem H. Buiter | December 20th, 2007 at 12:10 am | Report this comment“There should be proper assistance and relief for all the poor, but no special aid ‘pots’ for those who are threatened with poverty because of their own greed and ignorance. That would be both unfair and incentive-corrupting.”
Buiter, Agreed; But listening to Greenspan’s nonsense is not the way forward.
In the US the main problem is “Real Wealth” failure for the middle class(who are quickly becoming working poor)
The Real Wealth failure is a product of improper use of balance sheet accounting on consumption services.
The only usable information from the consumption balance sheets of consumers is the liability side. With rapidly deteriorating pension schemes, moving forward households will reduce shelter service liabilities by an extraordinary amount.
Any interference in this process, ie; stopping or slowing the coming housing service expense adjustment will be catastrophic for large swaths of older americans.
The housing bubble was “as ponzi as ponzi gets”, being a non productive “investment”.
Let’s not interfere with neeed adjustment process.
Posted by: groucho | December 20th, 2007 at 3:18 pm | Report this commentI am posting this on behalf of Mr Per Kurowski, whose own post was refused by an over-active spam filter on FT.COM - one to which I have fallen victim at times also.
Mr. Kurowski’s post starts here:
My comment to Quasi-fiscal scoundrels, Part 2 was
Buiter says “First, there is no valid argument based on poverty relief or on fairness/distributive justice, for bailing out subprime mortgage borrowers. … They borrowed imprudently and … should live with the consequences. … If there was miss-selling of subprime mortgages to unsophisticated borrowers and if this amounted either to negligence by the originators or to deception or fraud, the civil or criminal courts are the places to deal with these matters.
I am not that sure. These borrowers would have never been offered this subprime financial product had it not been for the credit rating agencies blessing the securities collateralized with these mortgages. Suffice to read for instance Fitch’s own reporton how they intend to correct themselves to understand what a shoddy piece of work these credit rating agencies did.
And the opinions of the credit rating agencies would not by a long stretch have signified so much had they not been empowered by the regulators (Greenspan included) as the overseers, commissars, or Blackwater type financial operators. And so if we now are tempted to do some Soviet central planning it is only because that was done earlier on a monumental scale.
Does this mean we should prosecute the regulators as the intellectual schemers? You tell me!
One of the big mysteries to me is how all those who profess to be libertarians kept silent when so much power was given to the credit rating agencies.
Posted by: Willem H. Buiter | December 20th, 2007 at 8:10 pm | Report this commentDear all,
Over the holiday season the comments posted to the blog will be pre-moderated by FT staff. This may result in a delay in your comment appearing, but we will keep these delays to a minimum. We will return to post-moderating comments at the start of 2008.
Many thanks for all your contributions, and best wishes for the season.
Posted by: Damian Carrington, Interactive Editor, FT.com | December 21st, 2007 at 2:20 pm | Report this commentOn UK governments reason for bailing out Northern Rock (et al?). One of the risks widely identified by economists to the UK economy over the next year relates to confidence, aka public perception. A crucial part of this is making sure unsophisticated retail banking consumers feel sure that their savings and homes are safe. If they feel at risk they will stop spending whilst they work out where they feel its safe to put their money.
I would argue that public confidence - aside from the Chancellor’s obvious wish not to preside over a disaster which would tie his boss’ hands over choosing when to call an election - is more of a factor in the chancellor’s decision than this article allows.
The way that I see it is that Northern Rock was a consumer con(fidence) job. A very sloppy one too. On 17 September ordinary people did not believe their money was safe. It took the government to promise to underwrite their deposits in full to persuade them. This is irrespective of the fact the average saver at Northern Rock would be well under the threshold where the government wouldn’t pay out the full amount of their savings.
I suspect that the average person conflates bailing out the bank with guaranteeing the assets or individuals with Northern Rock accounts/mortgages. In bailing out the institution the Chancellor is in effect holding the hands of savers and houseowners. Whether the risk/costs to taxpayers of doing this increase consumer confidence and help the UK economy is beyond my ability to tell.
Posted by: Claire | January 4th, 2008 at 2:43 am | Report this comment