The most deceitful form of socialism

Professor Willem Buiter, blogging for the Financial Times, has a modest proposal--and some "inconvenient truths"--to discuss with American taxpayers:

On July 11, 2008, the New York Times reported that US government officials were considering a plan for the US government to take over Fannie Mae and/or Freddie Mac if their financial situations were to worsen due to the US housing crisis. These government officials were also reported by the New York Times as stating that the government had also considered calling for an explicit federal government guarantee of $5 trillion on debt owned or guaranteed by the two companies through legislation. You can see why the creditors to these GSEs don’t seem to be too worried. There are many forms of socialism. The version practiced in the US is the most deceitful one I know. An honest, courageous socialist government would say: this is a worthwhile social purpose (financing home ownership, helping my friends on Wall Street); therefore I am going to subsidize it; and here are the additional taxes (or cuts in other public spending) to finance it.

Instead the dishonest, spineless socialist policy makers in successive Democratic and Republican administrations have systematically tried to hide both the subsidies and size and distribution of the incremental fiscal burden associated with the provision of these subsidies, behind an endless array of opaque arrangements and institutions. Off-balance-sheet vehicles and off-budget financing were the bread and butter of the US federal government long before they became popular in Wall Street and the City of London.

[..]

So let’s call a spade a bloody shovel: nationalise Freddie Mac and Fannie May. They should never have been privatised in the first place. Cost the exercise. Increase taxes or cut other public spending to finance the exercise. But stop pretending. Stop lying about the financial viability of institutions designed to hand out subsidies to favoured constituencies. These GSEs were designed to make losses. They are expected to make losses. If they don’t make losses they are not serving their political purpose.

So I call on Secretary Paulson, Chairman Bernanke and Director Lockhart to drop the market-friendly fig-leaf. Be a socialist and proud of it. Come out of the red closet. The Soviet Union may have collapsed, but the cause of socialism is alive and well in the USA. Granted, the US version of socialism is imperfect thus far. The federal authorities have mainly intervened to socialise the losses in the financial sector while allowing the profits to continue to be drained off into selected private pockets. But that is bound to be an oversight. It surely cannot be the intention of such committed Marxists to target taxpayer-funded largesse solely at the very rich and at a few favoured, electorally sensitive constituencies. Fannie and Freddie are, or will be, safe in the hands of comrades Paulson, Bernanke and Lockhart.

Update, Sunday evening: A few hours after I posted this, CNN announced that the Treasury Department and the Federal Reserve have a plan prop up Fannie Mae and Freddie Mac, undoubtedly hoping to head off more bloodletting when US markets open Monday morning.

You only learn who has been swimming naked when the tide goes out

[Warren] Buffett’s annual letter to shareholders, which was released Friday, has become something of a business institution, with the certainty that he will offer caustic comments and the hope that he will shed light on his investments.

This year, his scorn was aimed at the “financial folly” of lenders who financed the housing boom, since vanished, and at companies that use rosy assumptions of investment success to raise reported profits.

The comments, which were released after the market closed, came as Berkshire reported that fourth-quarter profit fell 18 percent, in part because of falling insurance rates. Net income decreased to $2.95 billion, or $1,904 a share, from $3.58 billion, or $2,323, a year earlier.

Mr. Buffett offered no commentary on Berkshire’s foray into the municipal bond insurance business, and no explanation of why he spent $1.5 billion to buy a 1.3 percent stake in Sanofi-Aventis.

But he was willing to say, in effect, “I told you so,” in recalling his warning a year ago about “weakened lending practices” in the mortgage market.

“Just about all Americans came to believe that house prices would forever rise,” he wrote. “That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that H.P.A. — house price appreciation — would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out — and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Buffett's State of the World: There's Folly in Wonderland (New York Times, 1 March 2008)

Related: Warren Buffett's 2007 Letter to Shareholders (BerkshireHathaway.com)

Michael Lewis explains it all for you

The subprime mortgage / credit market mess, broken down for you by Michael Lewis at Bloomberg.com:

This is what happens when you lend money to poor people.

This is way too good to excerpt.  Go read the whole thing.

Oh, okay... *one* little excerpt:

Call me a romantic: I want everyone to have a shot at the American dream. Even people who haven't earned it. I did everything I could so that these schlubs could at least own their own place. The media is now making my generosity out to be some kind of scandal. Teaser rates weren't a scandal. Teaser rates were a sign of misplaced trust: I trusted these people to get their teams of lawyers to vet anything before they signed it. Turns out, if you're poor, you don't need to pay lawyers. You don't like the deal you just wave your hands in the air and moan about how poor you are. Then you default.

A Wall Street Trader Draws Some Subprime Lessons: Michael Lewis (Bloomberg.com)