Just thought I\’d dig this up from a few weeks ago. Will Huttons cure for what ails the mortgage markets was that we should immediately create a Freddie Mac:
Also, the US has only been able to avert disaster in its mortgage market via the guarantees offered by two huge public mortgage banks – Fannie Mae and Freddie Mac – which directly or indirectly have provided 80 per cent of all new US mortgages over the last six months. Together, they guarantee more than half of the US\’s £5 trillion of mortgage debt.
In the US, a bank has the safety valve of being able to turn to one of the public mortgage banks which will either buy or, in effect, insure the mortgage and so keep mortgages flowing in bad times. Without them, the US would have suffered an even bigger house price crisis. In Britain, our banks and building societies have no such safety valve and are paralysed. Nor is any immediate relief promised by lowering interest rates. Instead, Bank of England governor Mervyn King threatens a rise.
We are looking disaster in the face. A British version of Fannie Mae and Freddie Mac must be created now. Legislation to create a Gordon Mac should be introduced before the summer recess. It should be operating by the end of September. Nor is this just an economic gambit. It will be opposed by the Conservatives as an \’anti-business\’ public intervention. They are wrong. The only way out of this crisis is to embrace the politics of public purpose rooted in the economics of Keynes. Mr Brown has an opportunity to restore the housing market, the economy and his political fortunes. He must act.
That was June 22 2008.
By July 15th James Hamilton was asserting that Freddie and Fannie were part of the problem, that they had helped to cause the crisis. As was, to a smaller extent, Paul Ktugman. Uncharted Territory adds another reason why they contributed. By July 16th Larry Summers was saying:
This is roughly the rationale behind Fannie Mae and Freddie Mac. I would submit that it is about as good or as bad as most creative capitalism ideas involving joint profit making and social objectives. But one hopes that we are now witnessing the end of this particular experiment in creative capitalism: the government is moving to pick up the pieces of the mess the GSEs have made and their shareholders are losing most of their money.
What went wrong? The illusion that the companies were doing virtuous work made it impossible to build a political case for serious regulation. When there were social failures the companies always blamed their need to perform for the shareholders. When there were business failures it was always the result of their social obligations. Government budget discipline was not appropriate because it was always emphasized that they were "private companies.” But market discipline was nearly nonexistent given the general perception — now validated — that their debt was government backed. Little wonder with gains privatized and losses socialized that the enterprises have gambled their way into financial catastrophe.
I wonder how general the lesson here might be. My fear is fairly general. Inherent in the multiple objectives urged for creative capitalists is a loss of accountability with respect to performance. The sense that the mission is virtuous is always a great club for beating down skeptics. When institutions have special responsibilities it is necessary that they be supported in competition to the detriment of market efficiency.
It is hard in this world to do well. It is hard to do good. When I hear a claim that an institution is going to do both, I reach for my wallet. You should too.
So, Will suggests as the solution to our problems the very thing that has made the American problems worse. Well done, don\’t you think? Extremely well done.
Will Hutton, friggin\’ genius.