Jim Jubak: Understands the Problem
Jim Jubak is a professional stock picker/pundit who has tended to do fairly well for himself. Although I don’t mean to endorse him as a portfolio advisor, I’m pretty certain you could do far worse as far as financial writers go. Take his latest column for MSN Money, for example.
Without focusing too much on the fact that Jubak seems to think that a central bank is a necessity, let’s look at his ideas for the future of Fannie Mae and Freddie Mac, the profit-privatizing, loss-socializing, federally-backed mortgage monstrosities. First, he seems to understand that regime change is one of the conditions that the market will act on, unlike most regulators who assume that their fiats will have no effects on incentives and will work exactly as advertised. He also seems to grasp the idea of unintended consequences. Skepticism of Washington’s version of “reform” and explicit acknowledgement of unanticipated effects is fairly rare in the current discourse, but here it is:
Reform — a word that covers a multitude of sins, good intentions and botched legislation — is a far different matter. Once you start making changes in a market, then you leave yourself wide open to unintended and unanticipated effects.
Not bad. But even better is the fact that he seems to realize that the only solution is winding these beasts down. To analogize, if you have a mosquito problem, you can use bug spray, you can poison the area, you can stay inside, or you can complain while they bite you. Or you could drain the swamp.
But Fannie Mae and Freddie Mac need more than fixing; they need to be dismantled. The capital markets during normal times are up to the job of setting mortgage prices (otherwise known as interest rates), and private companies can price mortgage guarantees with less distortion than can entities that believe they can tap into the U.S. Treasury. Certainly, linking an implicit government guarantee with private, for-profit companies, as Fannie Mae and Freddie Mac once were, has proved to be a really, really bad idea.
I’m not sure that the authority which is charged with winding Fannie and Freddie down needs to be able to make changes mid-course, or even really needs a delicate hand at the controls. I think that if you were to lay out the plan up front, say a five-year wind-down at a set pace or with periodic step-ups or step-downs, markets would have enough information to act in the short term and plan in the long term. Just as changing the mortgage rules mid-boom led to overconsumption of mortgages, I think changing the wind-down rules mid-breakup would lead to underconsumption of the remnants of Fannie and Freddie’s portfolios.
However, regardless of how it’s done, in the end there has to be an ending.