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The Vanishing Middle Class

8:00 am in Uncategorized by E.L. Beck

The Waters Begin to Churn

During my return to graduate school a few years ago, I had enrolled in a class on international political economy and a requirement, naturally, was to complete a paper. I elected to write on Japan’s “Lost Decade.” Before I dove into the topic’s research, I only held a sketchy picture of Japan’s long recession, one that started in the early ‘90s due to a collapse in that country’s commercial real estate market, and assumed that by 2004 – the year I wrote the paper (rewritten for a general audience as A Roadmap to Follow, now posted on Scribd) – the recession would be over. Nevertheless, I was intrigued by such a lengthy economic downturn.

As my research unfolded a clearer picture, I started to see that, far from moving on, Japan was entering its second consecutive “Lost Decade,” and that the country was truly suffering from some intransigent economic problems. Despite enormous amounts of fiscal stimulus from Japan’s national government, its economic woes had taken root and were not going away. As I drilled through the various arguments as to why this reality took hold – the commercial real estate bubble, Japan’s government propping up failed banks, and a stubborn deflationary cycle, to name a few – I started to understand that the true root causes could be traced back to the 1980s.

It was then that, in response to the United States levying steep tariffs to protect the domestic automotive industry during the Reagan administration, Japanese automakers responded by building manufacturing plants here in the U.S. There were no grand strategies at play here: Japan’s automakers were simply responding to a threat to their ongoing viability as companies. What no one – to the best of my knowledge – perceived at the time was that this offshoring of manufacturing would eventually open the flood gates for Japanese companies from across the industrial spectrum to send more and more jobs overseas.

This bleeding of middle-income jobs took an immediate toll on Japan; the commercial real estate collapse was merely the triggering device. That it happened so soon in Japan can be explained, I argued in the paper, by the fact that Japanese are net savers, a then-culturally ingrained tendency. As a result, Japanese consumers did not lift their country’s moribund economy by spending on credit; they simply did the rational thing and stopped spending. As time went on, this created a deflationary spiral downwards. It took five years after the real-estate collapse before deflation appeared on Japan’s radar and nine years before deflation took a particularly nasty – and entrenched – turn. There was simply no demand to be found anywhere in the country.

In the United States, manufacturers also started to offshore jobs during the ‘80s, but no long, severe recession turned up. The difference? When Japan’s middle incomes stagnated, Japanese tightened their belts and stopped spending. Americans, on the other hand, responded by going on a spending binge, increasing credit card debt to new highs, taking out equity loans on their abodes, and buying new homes. When home prices reached record heights due to demand, Americans signed on to ever more sophisticated mortgages that allowed little or no down payments, with low monthly payments for the first few years (balloon mortgages). Americans didn’t care: They assumed that before the reset took effect, the house would be sold and another one bought. In short, Americans made up for a lack in increased in wages with an increase in credit lines.

I wanted to make this parallel at the end of the paper, and show that the U.S. was following the same track. Data from the Federal Reserve and the Census Bureau were showing the rising indebtedness versus stagnant incomes but at the time, the American economy was doing fine, brushing itself off after a quick downturn in the wake of the technology bubble bursting in 2001. “Stick to Japan,” my professor suggested. “Anything else is just conjecture on your part.”

Sage advice for the time, but by 2007 my instincts proved correct. In March of that year, I caught a glimpse of a news story about a mortgage company – New Century Financial – that had specialized in subprime mortgages and was now in trouble. In the paper on Japan, I noted the ravaging effects of deflation on home prices, but did not necessarily foresee that the economic collapse in the United States would emanate from the housing market. Who could have guessed banks and financial institutions would hand out mortgages to borrowers in no position to repay? Perhaps when banks have to reach out to the subprime market to issue more credit, that’s an indication the prime credit markets are saturated, not a good thing.  Nevertheless, the number of defaults, primarily buyers who had purchased homes using subprime mortgages, was increasing at New Century and causing the company financial stress.

I knew it was only a matter of time.

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Freddie and Fannie Crap Gold Eggs for Wall Street

8:59 am in Uncategorized by E.L. Beck

Despite all the blathering in early 2011, from both sides of the aisle, regarding attempts to wind down Fannie Mae and Freddie Mac (and here and here and here), securities guaranteed by these government-backed entities (yes, government backed… let’s no longer pretend U.S. taxpayers are not on the hook for these white elephants) are now at $1.72 trillion, compared to $1.2 trillion at this time last year, according to Bloomberg News this morning.

Freddie Mac Logo

The continued existence of Freddie Mac & Fannie Mae serves Wall Street.

And let’s face it, considering how the Mac and Mae geese are shitting golden eggs right into Wall Street’s lap, these financially troubled mortgage giants are not going to be closed. Consider the following headlines since the beginning of 2011 to the present (in chronological order; headline abbreviations are mine):

Citi Dumped Bad Mortgages onto Mac

Wells Fargo Refuses to Settle w Mac and Mae

Taxpayers Pay Mac and Mae’s Legal Fees

Taxpayers Still at Risk from Mac and Mae

Fannie Mae Seeks $5.18 Billion More

S&P Lowers Mac and Mae Ratings

F Mac Uses Defective Analysis to settle w Bank of America

Mac and Mae Hesitate to Help Homeowners

Mae Killed Principal Reduction Program

Mae Refuses to Punish Countrywide

Mae Enriches Private Equity

All of this, including the rise on mortgage-backed bonds, plays into the hands of Wall Street in one fashion or another.

With a track record like this, no Federal politician or cabinet member or agency with Wall-Street dirt on their knees is going to pull the plug on Mac and Mae… until the next downturn necessitates their demise.

D.C.? Just send the bailout bill to us middle-income taxpayers. We’ll happily cover it with all our riches.