"Our Country!
In her intercourse with foreign nations may she always be in the right;
but right or wrong, our country!"

    --Commodore Stephen Decatur

Wednesday, April 21, 2010

Health Care Hangover

Democrats are eager to "pivot" away from the political hangover of health care reform and instead sieze on public anger about the economy.  The Washington Post reports that Democrats in the Senate have passed a major milestone, winning committee approval of language that would implement a massive new regulatory scheme for the derivatives market.

However, the article doesn't mention which kind of derivative is actually related to the financial upheaval of the past several years--namely, credit default swaps.  The credit default swap is a type of derivative which was created by the large investment banks as a hedge on the supposedly "riskless" collateralized debt obligations--especially those consisting of mortgage-backed securities.

Meanwhile, a little-noticed Congressional Budget Office report was released back in January revealed that Fannie Mae and Freddie Mac are predicted to cost taxpayers nearly $400 billion over the next decade.
In its August 2009 baseline, CBO projected that the operations of Fannie Mae and Freddie Mac would have a total budgetary cost of $389 billion between 2009 and 2019.  (That cost includes subsidies for assistance to homeowners under the Administration’s Making Home Affordable plan.)  The bulk of the outlays ($291 billion) were estimated to occur in 2009.  That figure reflects the recognition of substantial losses on the entire outstanding stock of mortgages held or guaranteed by Fannie Mae and Freddie Mac at that time.
The American people are angry and Democrats are more than happy to direct that anger at Wall Street.  Creating new regulations for the derivatives market will certainly punish Wall Street, but as their name implies, the derivatives were not at the root of the crisis.  Rather, the shocking loss in value of the underlying real assets--in this case, risky mortgages underwritten by Fannie and Freddie--caused the upheaval.

Instead of pandering to populist outrage, the Washington Post should educate its readers about the real source of the problem and at the same time hold the politicians accountable for the policies which encouraged Fannie and Freddie to flood the market with so-called "toxic assets" in the first place.  Punishing Wall Street will only hurt the long-term growth potential of the American economy, and by failing to punish Fannie and Freddie, Democrats will only hurt the American taxpayer.

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