September 23, 2008

A blast from the past – 1999 New York Times on Fannie and Freddie

“Fannie Mae Eases Credit To Aid Mortgage Lending,” New York Times, September 1999. In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders. Hmm, making loans easier to get eventually led to higher demand and higher home prices which hurt “minorities and low-income consumers.” All in all, home ownnership went from the mid 60% to the high 60% range but that was enough to let housing prices to take off. The current housing “correction” is doing more for housing affordability for minorities and low income…

September 22, 2008

Goldman and Morgan abandon investment banking, become banks

September, 2008 will eventually get a nickname. Monday, October 19, 1987 was “Black Monday.” October, 1929 was “The Crash.” I would love to see your suggested nicknames for September 2008 in the comments. NYTimes.com Goldman Sachs and Morgan Stanley, the last big independent investment banks on Wall Street, will transform themselves into bank holding companies subject to far greater regulation, the Federal Reserve said Sunday night, a move that fundamentally reshapes an era of high finance that defined the modern Gilded Age. The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms. It was a blunt acknowledgment…

September 21, 2008

Money-market bank run last week

WSJ.com Fed staff discovered that one reason the federal-funds rate was behaving so abnormally was because money-market funds were building up cash in preparation for redemptions, leaving hoards of cash at their banks that the banks wouldn’t invest. U.S. depositary institutions on average held excess reserves of $90 billion each day this week, estimates Lou Crandall, chief economist at Wrightson ICAP. This is cash the banks hold on the sidelines that does not earn any interest. That compares with an average of $2 billion, he says, noting he estimates banks held $190 billion in excess cash on Thursday, as they feared they’d have to meet many obligations at the same…

September 21, 2008

Is there any other good news out there?

WSJ.com Q: Is there any other good news out there? A: Yes. The recent collapse of energy and commodity prices will make it easier for consumers to fill up their gas tanks and heat their homes. It also will reduce pressures on many companies. At the same time, inflation fears are subsiding, as the consumer price index fell 0.1% in August, the first monthly fall in almost two years. That all makes it virtually certain that the Federal Reserve won’t raise interest rates any time soon, and might even cut them. Moreover, hard as it is, investors should work to see the bright side of low stock prices. “Only those…

September 19, 2008

Everything you always wanted to know about our financial crisis but were afraid to ask

Here is a long piece that does a great job of clearly explaining what the heck is going on in the financial markets. This episode started when the Treasury nationalized Fannie Mae and Freddie Mac on September 8. Their combined assets are over $5 trillion. These firms help guarantee most of the mortgages in the United States. The Treasury only got authority from Congress to take this action in July, and in seeking the authority had insisted that no intervention would be needed. The Treasury has replaced the management of both companies and will presumably oversee their operation. This decision marked an acknowledgment by the government that the mortgage market…

September 19, 2008

Were Fannie and Freddie just nationalized?

I studied a lot about international economic development in my college days. In fact, my M.S. degree focused on international agricultural development. Just the word “nationalization” scares me. In those days, third world countries would often nationalize a company for the “good of the people.” Usually, the real reasons were politics and money; to silence a political rival (the company management) and milk the company for personal and political cash. Companies usually tanked following nationalization, becoming a drag on the economy instead of an engine of economic growth. After nationalization, the company’s goals became political, not economic. My worry is that our political geniuses in Washington D.C. will soon figure…