July 9, 2008 9:25

Fannie and Freddie: Time to become government agencies again?

The WSJ is reporting that people in the Bush administration are beginning to talk seriously--albeit of course entirely hypothetically--"about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter."

The view from outside the administration is pretty straightforward, the paper reports:

If a loss of confidence among investors made it impossible for Fannie and Freddie to continue supporting the mortgage market, "the government would have to step in," said Douglas Elmendorf, an economist at the Brookings Institution in Washington.

"They can't be allowed to fail," said Peter Wallison, a former Treasury Department general counsel. "The losses would extend through so much of our economy, and so much of the world economy. There is simply no way that the United States government can let it happen."

The folks at S&P ran a little thought experiment a while back and estimated that the cost of a Fannie/Freddie bailout would run somewhere between $420 billion and $1.1 trillion. Better that than another Great Depression, I guess. But if it comes to that is there any way we can help pay for it by garnisheeing the investment income of all the ex-Fannie/Freddie execs who raked in zillion-dollar paychecks back when we were under the mistaken impression that the two companies were private enterprises?

Update: In the most exciting development of my career so far, this post has been linked to by the Dutch-language financial media (at least by a blog on the website of the Belgian paper de Tijd). So to my hordes of new readers from across the sea, I say: Welkom, allemaal! Ga je comments gewoon in het vlaams schrijven!

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July 9, 2008 2:39

Did I say "hate"? No, no, I meant "love"

Yesterday, I wrote about Boone Pickens's plan to plaster the center of the country with windmills. He's on a PR blitz, trying to convince the country and its politicians—especially those two guys running for President—that we need to go hog wild into wind energy. (Could maybe have something to do with the massive wind farm he's building in Texas.)

This morning a reader of the Curious Capitalist—okay, the Curious Capitalist himself—pointed out how Pickens wasn't always so in love with wind energy. He forwarded me a link to this blog post, which includes this quote:

“I was in wind energy for a minute…. I hate it. And when I got to looking at those damn things I said, I don't want to be a part of putting that on the horizon. I think it's homely and I don't like it. We took a loss and got out of it and I'm glad I did.”

—T. Boone Pickens, Bloomberg, February 17, 2005

Could I get a "flip flop" from the crowd?

Oh, but that's okay. Boone Pickens is, before anything else, a capitalist. I think that's something we can respect here, on a blog about capitalism. And even though Pickens can gloss over his true motivations with the best of them, he does also do that fantastic Texan straight-talk thing. From an April article about Pickens and wind power:

"Don't get the idea that I've turned green," Pickens tells the Guardian in the Dallas offices of his new venture Mesa Power. "My business is making money, and I think this is going to make a lot of money."

[UPDATE (of a sort): I do know that Pickens is originally from Oklahoma, not Texas. Though I doubt anyone would argue about my characterization of his style as Texan straight-talk.]

Barbara!

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July 9, 2008 1:14

McCain gets all disgraceful about Social Security

Josh Marshall has an outraged little post this morning on something that John McCain said about Social Security the other day:

McCain told a townhall in Denver on Monday, "Americans have got to understand that. Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace and it's got to be fixed."

It's really a disgrace? That's how the system was designed to operate. And it's served as financial bedrock of retirement security in this country for going on a century.

I would imagine that this was more a case of McCain misspeaking or misunderstanding than having a secret plan to dismantle Social Security as we know it. But still, calling Social Security a "disgrace" is just patently ridiculous. Giving retirees a claim on current workers' earnings is actually a pretty economically sensible way to fund retirement (just ask Robert Merton!), although it shouldn't be the only way. And while Social Security may have some long-run funding issues as the ratio of active workers to retirees shrinks, they certainly aren't insurmountable or disgraceful.

The only disgraceful thing involving Social Security at the moment is that payroll taxes are being used to paper over deficit spending by the rest of the federal government. Or if you want to get all class-warfarey about, payroll taxes paid by working- and middle-class Americans that are intended for Social Security's coffers are instead being diverted to fund income tax cuts for the rich. I'm sure McCain will be addressing this outrage at his next town hall meeting.

The other thing that gets me about this whole Social Security discussion is that the real retirement crisis of today is the disappearance of the corporate pension and its far-less-than-adequate replacement by the 401(k). That's what the candidates ought to be talking about. But while both Obama and McCain are amenable to the idea of creating some sort of new system of retirement accounts to supplement 401(k)s and Social Security (Obama has been the most explicit about it), this just hasn't become a major campaign topic. I blame the %$&#* mainstream media. Especially the newsweeklies' economics columnists.

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July 9, 2008 7:25

What do onion prices tell us about oil prices?

A reader asked me a while back what I thought of this little article by my former Fortune colleague Jon Birger about onions:

The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders (and not the new farms sprouting up in Wisconsin) were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.

And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings. Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices soared 400% between October 2006 and April 2007, when weather reduced crops, according to the U.S. Department of Agriculture, only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April. ...

It's an interesting tale, but I'm afraid I know too much about this little onion story to entirely accept the argument that futures markets reduce price volatility. I mean, I'm all for futures markets, simply because they provide a way for producers and consumers to lock in prices if they want to. But the most important of the academics who have argued that futures trading diminishes extreme price swings, Holbrook Working, devised an onion-based test for his hypothesis--what others were later to dub the efficient market hypothesis--that ended up delivering less than conclusive results. After the break, the full story, adapted from some book that somebody's planning to publish next year:

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