What to do with Freddie and Fannie

“Marginal Revolution has an interesting post on the Freddie Mac and Fannie Mae bailout entitled Did we *really* need that bail-out? The argument for this bailout is ultimately about preventing a catastrophic financial meltdown. Surely, the likelihood of this can be debated. Nevertheless, accepting that motivation allows us to ask what would have been the cheapest, most effective, least moral hazard generating, and fairest methods of resolving this. Even as the libertarian in me despises this meddling, the policy wonk in me wonders why this policy was designed so terribly. For example, why did/do we have to insure them at par? That is to say, why did we have to promise (or even suggest) that bonds purchased from these entities would lose neither principle nor interest? One reason that high deductible insurance is cheaper (besides lower payouts) is because it mitigates the moral hazard so much better that low deductible ones do. Even that bastion of middle class government financial insurance, the FDIC, only insures the principle and not the interest on deposits and CDs at member banks. I don’t see why investors in these organizations should get better insurance then you and I do down at the corner bank. Another argument, that I first noticed over at Mankiw (Thoughts on the GSE Takeover) is that why should the debt holders be protected while the the equity holders were wiped out? In a conventional corporation the equity holders lose all their investment before the debt holders lose a penny, but if the firms are bankrupt (or at least insolvent) why not allow some pain to hit the debt investors? It isn’t as though they are more moral or more deserving of protection. What to do to avoid a financial crisis can actually be a separate problem from what to do with Freddie and Fannie. For example, that’s because most commentators seem to agree any crisis here would be caused by an evaporation of international interest in US debt if the situation were not handled to their liking. The organizations themselves have made some bad investment decisions and were under-capitalized, but by most accounts have succeeded in modestly reducing mortgage interest rates. So, we could bail out the debt, say by allowing all investors to exchange their bonds in them for US treasury bonds of a similar term but with 95% of the face value, but do any number of things with the companies. We could give them a clean slate to raise financing, revoke their charters and wind them down, or fully privatize them, revoking their special powers and making them compete pari passu with other banks. Similarly, we could have pursued any of these options while deciding not to bail out the firms, or bailing out the equity holders as well. I especially like the idea of a equity wipe-out, a haircut on the value of the debt, and a wind down of their operations. As long as they are huge and configured as they are currently the perception will always remain that they will be insured by the US government. A law prohibiting government bank bailouts outside of the deposit insurance corporations would be policy icing my fantasy.”

Cleaning your windshield

“I can vouch that you can clean tree sap off your windshield with rubbing alcohol and elbow grease. However, because the alcohol melts the sap, you have to have a clean rag handy to wipe up the alcohol and dissolved sap before it dries. I recommend the following procedure. 1) Clean the windshield 2) Rub the sap with a cotton pad or sponge until the material desolves 3) Wipe the liquid off the windshield”

Foreigners for Obama

Until now, anti-Americanism has been exaggerated and much misunderstood: outside a leftist hardcore, it has mostly been anti-Bushism, opposition to this specific administration. But if McCain wins in November, that might well change. Suddenly Europeans and others will conclude that their dispute is with not only one ruling clique, but Americans themselves. For it will have been the American people, not the politicians, who will have passed up a once-in-a-generation chance for a fresh start – a fresh start the world is yearning for.

The world’s verdict will be harsh if the US rejects the man it yearns for This is plausible. When Brit. Russell Brand begged people to vote for Obama on this year’s VMA, he really was speaking for a lot of foreigners. I’m not sure we should care what they think about who we should elect, especially given the modest major policy differences between the two possible administrations. But it is worth recognizing that McCain’s soft power options could be limited by American unpopularity abroad in a way that Obama’s would not. However, it is unlikely that Obama would become the leftist savior that Western Europe and so many of America’s rivals hope him to be. I expect him to put up a vigorous defense of American interests and as such piss a lot of them off. I expect a popularity Honeymoon, perhaps to get a trade or climate deal done, and then it will be back to the old levels of anti-Americanism. Hat tip: Let