The backbone of the U.S. economy. Book#51
I saw Bethany McClean the author of this book Shaky Ground: The Strange Saga of the U.S. Mortgage Giants in an interview along Bill Ackman on the Charlie Rose show back in September 2015 and got to this book. I thought, hmm that’s important. Why? Because in the US, the health of the housing market determines the performance of the stock market. This is due in part to the wealth effect that induces consumption but mainly because the homebuilding industry provides so many jobs. Yet the US mortage insurance market is flawed.
These private companies were created in the first place by congress to boost first time home ownership. But they became a tool for politicians wanting to push ever more lending to boost the economy. The root of the GFC was not deregulation but dumb regulation i.e. pushing Fannie and Freddie to reduce standards and give money to lower credit people to buy home they could not afford.
They were operated as private businesses but there was always an expectation that the governement would honour any of their obligations. This unhealthy confusion has been the source of the problem. Pressured by politics, they insured everything down to subprime. The two institutions now represent 5 trillion of debt, vs. the total US debt of around 13 trillion. They have 80 pcent of the mortgage guarantee market. They have been bailed out. The government has not nationalised them but decided unilaterally to capture the vast majority of any future income. Further details here.
So they are effectively private businesses running on no capital and with no ability to replennish it because the government takes it all. Yet no one wants to admit that they are fully government agencies. Why? Because that would mean that their debt would need to be consolidated onto the national balance sheet and therefore that the national debt to gdp ratio would be much higher.
On the other hand, so many international institutions own their debt that it’s difficult for the US government to fully withdraw from them. The official view is still that Fannie and Freddie should not exists. But nothing happens, they remain in limbo protected by the government. For the government, releasing its grip on them would be equivalent to tightening credit conditions for home owners. Do they want to do that given the dull economic recovery?
I think Larry Summers point at the end of the book is valid. This system was created in the 1930s to boost home ownership. But today why do we need to support fixed long term ownership when the workforce is going to have to be more geographically flexible in the future ? We are now in a world of renters right ? Should we not subsidise first time home buyers only ? Or subsidise something else like health care ? The US is trapped. Housing has become the backbone of the economy. This helped me better understand Bill Ackman’s bet on it. Latest update here in Aug 2016.
My purpose in life is independence, fulfilment and a better understanding of how the world works. Like Charlie Munger, I believe in the discipline of mastering the best that other people have ever figured out. And like Sir Isaac Newton, I believe in our ability to see further than any others before us by acknowledging that we are standing on the shoulders of giants. With this blog I hope to keep track of my learning about investing, business, decision making, entrepreneurship and self development while inspiring others to do the same. For the moment the format of this blog will be one post for each book that has influenced me, but I expect it to evolve over time. Join my Journey. John.
