July 25, 2008

Really, Bill Poole?

Nothing would make me happier than never seeing another ideological simpleton from the Friedmanite school of disaster capitalists ever having another job in government or private industry. Why? Because they have ideological blinders on that keep them from accurately assessing a situation and determining a proper course of action.

Case in point, former St. Louis Fed President Bill Poole. Though he now likes to go by William, many of us know and remember him as Bill, Chairman Greeenspan's favorite echo chamber. Poole is all bullshit, all the time. His solution to this current crisis? Let's privatize Fannie and Freddie.

One shouldn't bother Bill with details and facts. For one thing, he doesn't want to hear that taxpayers aren't going to pay a dime for any of this. These companies will, as the government is only providing liquidity for currently illiquid securities, guaranteeing that the system will continue to function and loss mitigation procedures can run their course. But Poole's a Friedmanite and they love them some shock to get things moving. Unfortunately for him, the Democrats in Congress aren't prepared to hand over Fannie and Freddie to private interests (screwing existing shareholders) for pennies on the dollar.

What Bill doesn't want to acknowledge (here again, that pesky ideology) is that THE MARKET BROKE DOWN. The only thing anyone wants to own are credits backed by the government. And THAT'S the free market reality.

Absent the GSE's and their implicit government guarantee, the mortgage market would have ground to a halt, interest rates would be 3% higher (at a minimum) and home sales would have dropped to zilch. In turn, the loss mitigation and clearing of home inventory would have collapsed leading to a downward spiral that would have made the 30's look like the 50's.

Humans are imperfect. Humans in a market, whether for equities, commodities or debts, can act irrationally. They can bid up prices far beyond real value... and sell prices far below book value. That's why we need stop gaps. If you can't see that or think it would be just wonderful to return the pre-Fed, gold standard world, you're ignorant of the past and wholly unready to face the future.

Posted by mcblogger at July 25, 2008 03:02 PM

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