Pain in the Fannie

by Chidem Kurdas

As Fannie Mae goes for its next withdrawal from the $200 billion kitty the US Treasury graciously made available to this government-created and -sustained mortgage financer, it may be useful to look beyond the current housing slump and consider what it augers for the future.

Having made yet another loss, the government-sponsored enterprise needs more money. A report Fannie filed with the Securities and Exchange Commission attributes the $19 billion third-quarter loss to the housing slump and mortgage defaults.  “We do not expect to operate profitably in the foreseeable future,” says  the company.

I always thought it was a great triumph of government public relations to come up with the sweet-sounding Fannie Mae moniker for an entity officially called the Federal National Mortgage Association.  Now I understand what the nickname really means—a pain in the taxpayers’ backside for the foreseeable future.

The business has been adversely affected by helping delinquent or imminently-in-default borrowers to modify their mortgages so as to reduce their monthly payments. As the economy recovers, defaults will decline, and presumably this aid will no longer be needed. But it is not clear when – or even if – the subsidy program will end.

In fact, it may be extended.  Fannie “may recommend supplementing the program with other initiatives that would allow us, pursuant to our mission, to assist more homeowners.”

Elinor Ostrom and the Relevance of Economics

by Mario Rizzo  

The work of Elinor Ostrom, the first woman to receive the Nobel Prize in economics, is not very well-known among economists. In fact, I would venture the guess than most economists had not heard of her before the prize was announced yesterday morning.  

Two reasons for this are that her degree is in political science and she has written for publications outside of the mainstream economics journals. Additionally, her work, by and large, lacks the high degree of mathematical formalism now so characteristic of economics.  

Yet the Nobel Prize Committee has done a great service to economics and the greater social-scientific community.

Citi Phibro Selloff Shows Government Sham

by Chidem Kurdas

You’d think that the federal government wants Citigroup to return to financial health—if for no other reason to recoup the $45 billion of taxpayer money spent to shore up the bank in the credit freeze. You’d think the government wants a real effort to boost efficiency and profits. You’d be wrong.

What the Feds chose is a political charade. The pay czar objects to the $100 million compensation due to Citi’s star energy trader. Since the trader is contractually entitled to a share of the profits from Phibro, the phenomenally profitable energy trading subsidiary, there is no legal way not to pay him. So instead Citi is pressured to sell Phibro.

The bank complies. Occidental Petroleum snaps up the business at a bargain basement price. The WSJ quotes Occidental’s president as saying, “If you’ve got to sell, why should I pay a premium? What leverage does the seller have?” The lucky buyer added that Citi would never sell Phibro if it weren’t for pressure by the government.

Citi’s balance sheet is now in worse shape. It lost one of the few businesses that made money last year and had to sell under the worst possible circumstances, created by the government. Instead of slimming down by gradually getting rid of inefficient divisions so as to become a better-run company, the bank was forced to almost give away a valuable asset. And this to make it look like the government combated excessive pay.

Props to Obama

by Roger Koppl

Obama has been a bitter disappointment to me, though not really a surprise.  He is skilled at signaling goodness while concentrating benefits and dispersing costs.  That’s the norm for elected officials, especially at his level.  Bush was an exception because he was only mediocre at signaling goodness and yet a genius at increasing state power.  Still you gotta give Obama your props when he deserves them.  His statement on the prize was beautiful.  That’s the Obama I voted for!  Too bad that’s not the Obama making real choices as this Toronto Star op ed by Haroon Siddiqui chronicles.

Politics in One Lesson

by Roger Koppl

It is better to signal goodness than to do good.

That’s it.  That’s the lesson.  (Thanks to Steve Horwitz for the title of this post.)  Democratic politics is mostly about signals not substance.  The lesson is simple, but somehow hard to learn.

Ghost of Socially Useful Labor Haunts G20

by Chidem Kurdas

French president Nicolas Sarkozy reportedly wanted  the G20 leaders to introduce a special tax on all financial transactions, known as the Tobin tax. Mr. Sarkozy took the idea from Adair Turner, the head of the British Financial Services Authority. Lord Turner suggested last month that the tax might be used to shrink the financial sector, which has grown too big and is in part “socially useless.”

The argument that activities like securities trading add no social value and the labor is better channeled into other areas has now become popular. Hence the resurgence of James Tobin’s 1970s proposal of a tax on foreign exchange transactions to discourage speculative trading. But the notion of socially useful work dates back centuries. In fact, it reached its zenith with Marxian labor theory and Soviet planning.

According to Soviet ideology, any work in state-run factories or farms was socially useful, whereas private economic activities were likely motivated by greed and could harm public well-being. Another belief was that manufacturing and agriculture made “real” contributions but services like wholesale and retail trade did not.

This real vs. trade distinction is now to be found in commentaries on the financial sector. Thus a pundit writes that a Tobin tax “would squash the profitability of much of the short-term trading which swells investment bank profits without doing anything to create value in the real economy.”

The Calculus of Consent II

by Gene Callahan

In Chapter 5, “Organization of Human Activity,” Buchanan and Tullock discuss what constitutes a “rational” choice concerning social arrangements. They write, “We have assumed that the rational individual, when confronted with constitutional choice, will act so as to minimize his expected costs of social interdependence, which is equivalent to saying that he will act so as to maximize his expected ‘utility from social interdependence’.”

They then create three categories of costs, “(1) purely individualistic behavior, a; (2) private, voluntary, but jointly organized behavior, b; and (3) collective or governmental action, g.”

They then analyze all possible orderings of a, b, and g. This is all well and good, but it strikes me as rather empty of oomph. If these “costs” are defined narrowly, then the analysis is plainly false — I may use method b to organize my BBQ because I like socializing, despite the fact it would be far “cheaper” to just cook dinner for myself. But if one defines the costs broadly enough, so that we include the “cost” of not having friends around, the analysis becomes vacuous — all that is being said is that people pick the things they prefer, and all of the ordering business becomes pointless.

Special Interest Hypocrisy

by Mario Rizzo 

President Obama is complaining that the “special interests” are threatening his as-yet uncertain healthcare proposals. (Recall there is no Senate bill and nothing says that House bill won’t change significantly.)   

There is an interesting lesson here. What is meant by “special interests” and “general interests”?

The Calculus of Consent and Rawls

by Gene Callahan

I have a confession to make: I’m currently reading The Calculus of Consent for the first time. I thought it might be interesting and useful to post some of my thoughts on the book here. (And, please note, I’m posting to a blog, not writing a research paper — I am not doing a literature review to see if someone else has noted similar thoughts at some point.) First of all, consider this passage:

“For individual decisions on constitutional questions to be combined, some rules must be laid down; but, if so, who chooses these rules? And so on.

Healthcare Honesty

by Chidem Kurdas

Cost savings from Medicare are claimed as one of the major sources of finance for the new medical entitlement program making its way through Congress, a claim that is astonishing in its brazen disregard of history.

President Obama talks about eliminating waste and inefficiency in Medicare, then turns around and reassures people there won’t be any Medicare cuts.  The savings are to come entirely from making Medicare more efficient and paying only for quality service. This notion is not new. It’s been around a long time.  Medicare, from its inception in 1965, has been a bottomless pit where money silently disappears into the coffers of the medical-industrial complex. There’s been attempts over the decades to control costs, using a variety of methods.

In the 1990s, when health management organizations slowed down the growth of private medical spending, Congress enacted a law to apply managed care to Medicare. “The program was authorized by the Balanced Budget Act of 1997 with the intent of expanding health care options to Medicare beneficiaries by savings generated through what advocates assumed would be the efficiencies of managed care,” says a 2001 report.