Wednesday, August 08, 2007


Blaming the Tempter; never the Tempted

For at least a few years now, post writer Steve Pearlstein has been decrying an impending burst of a credit bubble. Like the proverbial stopped clock, it seems he’s finally onto something and so can now sit smugly:

“It's still early, but up to this point, the performance of the Bush administration and the Federal Reserve has been less than impressive. They were late to acknowledge the extent of the credit bubble and its potential impact on the economy. And ever since, they've been behind the curve, hamstrung by a free-market ideology and their own roles in allowing the bubble to develop in the first place.” Steven Pearlstein - Missed Opportunities

Well, it wouldn’t be a Steve Pearlstein column without some kind of gratuitous slam against the Bush administration. And you just got to love a Business columnist lamenting organizations as being “hamstrung by free-market ideology”…if only!!

Strangely, Mr. Pearlstein isn’t criticizing the Fed for their latest action (a no change on interest rates) - on that he actually agrees. No, his beef with the Fed seems to be that their primary public concern is with inflation. He thinks they should be dialoguing their concern with credit crunches. He doesn’t actually propose what this means the Fed should be doing about said credit crunches (although judging by current rates, credit doesn’t seem to be that much a problem yet) but I, for one, am just as happy to keep the Fed focused on not screwing things up for which inflation is a good scorekeeper.

He is also upset that the administration isn't reacting more forcefully to the recent problems in the mortgage sector. He thinks we should be turning more to Fannie Mae and Freddie Mac to provide some stability in the market:

“Unfortunately, that would require the Fed and the administration, after having spent six years demonizing Fan and Fred and trying to reduce their size and influence, to eat a heaping serving of political crow.”

If the Administration did demonize Fannie and Fred then it has to also be said that the two helped pick out the horns.

“In July 2003, an internal audit report, which included Raines and Mudd on its distribution list, cited problems with Fannie Mae's accounting controls that may have affected its books by as much as $155 million.

“Those warning signs came against the backdrop of an accounting scandal at Fannie Mae's direct competitor in the mortgage industry, Freddie Mac, a company with a virtually identical business model and a similar government charter to keep the housing markets supplied with money. The problems at Freddie Mac had raised widespread concerns about Fannie Mae's accounting -- concerns that Raines sought to dispel.” Fannie Mae Warnings Documented - March 2006 -

As can be expected from a business writer who is more versed in modern-day liberalism than economics, it all comes down to protecting the so-called innocents in all of this:

“But when, as result of market and regulatory failures, millions of Americans face the prospect of losing their homes, jobs or retirement savings, you'd expect the government to show a bit more urgency and candor about the problem, and more creativity and leadership in addressing it. This is hardly the time to head for the ranch and the beach and leave everything to Mr. Market.”

Actually, it’s Mr. Market that will probably clear everything up in the most efficient manner possible. Lenders who lent to suspect people will have to bear the price of their poor business decisions. If they go out of business, so be it. It’s painful but surely better than the rest of us having to soak it up for their poor judgment. And if you bought a home you can’t afford, why does it now descend upon the rest of us to somehow validate things for you? I firmly believe that the bigger danger in all this is government overreaction vice under reaction.

Which also seemed to be the instinct of a Washington Post writer in the aftermath of Hurricane Katrina:

“Nor is there any rationale in using taxpayer funds to bail out a mortgage industry that is coming off five years of spectacular growth in sales and profit. Sophisticated companies like Wells Fargo and Citigroup should have known the risks of loans to homeowners in flood-prone areas.” Don't Let Industry Win With Disaster Bailouts

I think Mr. Pearlstein was right in that instance.

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