Have you noticed how, when there is a crisis (social, economic, political) that congress goes looking for the bogeyman responsible? When trying to understand something that has profound implications, but over which we have little or no control, many of us are lured into believing a conspiracy theory - and congress is quick to oblige that tendency.
It's a ploy that sadly works all too often. Rather than address the issue at hand, our nation's fine politicians employ the classic red herring to refocus public attention on a decoy so that we overlook the fact that poor political judgment and imprudent public policies are responsible for the catastrophe du jour.
A couple of recent, high-profile situations serve as perfect examples of this type of political fraud: the high price of oil, and the meltdown of the two GSEs known as Fannie Mae and Freddie Mac.
High-Priced Oil
In the oil situation it is worth noting that the rapid increase in price, as evidenced by what consumers have to pay at the gasoline pump, has caught everyone off guard. Automobile manufacturers, airlines, trucking, and the typical family have all suffered immensely and are weighing their options. It has had widespread and deleterious effects. But is there a bogeyman responsible, or is it simply the result of market forces at work?
Congress, because it allows them a chance to say "we're working on it," believes in the former. If you listen to the pomposity and bluster coming out of Washington, you would quickly come to realize that you are paying upwards of $4.00 for a gallon of gas because of those evil futures market traders.
Never mind the fact the futures trading is absolutely necessary to keep the spot markets functioning effectively and efficiently. Never mind the fact that world-wide demand for petroleum is at an all-time high, and that the huge emerging economies in India and China have insatiable appetites for energy. The futures traders are a convenient scapegoat which we're going to blame and investigate!
Fannie and Freddie
If you have a pulse you have no doubt heard about the housing crisis and the disruptions it has caused in the mortgage lending business. Fannie Mae (FMN) and Freddie Mac (FRE) are GSEs that were created to help provide liquidity and safety to the mortgage lenders. Their charter is summarized in this excerpt from the Fannie Mae web site:
"Fannie Mae provides stability, liquidity, and affordability to the nation's housing finance system under all economic conditions. We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market."
"Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America."
It has become apparent in recent days that both of these entities are having a hard time delivering on this charter due to the effects that the sub-prime mortgage debacle has had on the mortgage markets. Their struggles have made investors in these two quasi-public entities very nervous, and those investors have been fleeing in droves causing a precipitous drop in the stock prices.
Congress, in its infinite wisdom, is, again, looking for demons in all the wrong places. They are convinced that if they look hard enough they will surely find a tail wagging this dog.
Rather than address the causes of the financial industry crisis, they chose to focus on a minor consequence of that crisis - the dramatic drop in the price of Fannie Mae and Freddie Mac stock prices. Yes, both entities were in trouble, but the falling stock price was a symptom of that trouble, not a cause! Nevertheless, congress, with great fanfare announced that they have found the culprit: a type of stock trade known as naked short selling.
To say that naked short selling is responsible for the dramatic loss of value in the shares of these two GSEs is just plain wrong. This is tantamount to saying that it rained today because I washed my car yesterday. Naked short selling may have had a collateral effect on the stock prices, but the main reason that investors are fleeing those equities is because the entities behind them are in deep financial trouble! To identify the falling stock prices as a cause and not an effect of the GSE crisis is ludicrous!
A couple of recent, high-profile situations serve as perfect examples of this type of political fraud: the high price of oil, and the meltdown of the two GSEs known as Fannie Mae and Freddie Mac.
High-Priced Oil
In the oil situation it is worth noting that the rapid increase in price, as evidenced by what consumers have to pay at the gasoline pump, has caught everyone off guard. Automobile manufacturers, airlines, trucking, and the typical family have all suffered immensely and are weighing their options. It has had widespread and deleterious effects. But is there a bogeyman responsible, or is it simply the result of market forces at work?
Congress, because it allows them a chance to say "we're working on it," believes in the former. If you listen to the pomposity and bluster coming out of Washington, you would quickly come to realize that you are paying upwards of $4.00 for a gallon of gas because of those evil futures market traders.
Never mind the fact the futures trading is absolutely necessary to keep the spot markets functioning effectively and efficiently. Never mind the fact that world-wide demand for petroleum is at an all-time high, and that the huge emerging economies in India and China have insatiable appetites for energy. The futures traders are a convenient scapegoat which we're going to blame and investigate!
Fannie and Freddie
If you have a pulse you have no doubt heard about the housing crisis and the disruptions it has caused in the mortgage lending business. Fannie Mae (FMN) and Freddie Mac (FRE) are GSEs that were created to help provide liquidity and safety to the mortgage lenders. Their charter is summarized in this excerpt from the Fannie Mae web site:
"Fannie Mae provides stability, liquidity, and affordability to the nation's housing finance system under all economic conditions. We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market."
"Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates. Our job is to help those who house America."
It has become apparent in recent days that both of these entities are having a hard time delivering on this charter due to the effects that the sub-prime mortgage debacle has had on the mortgage markets. Their struggles have made investors in these two quasi-public entities very nervous, and those investors have been fleeing in droves causing a precipitous drop in the stock prices.
Congress, in its infinite wisdom, is, again, looking for demons in all the wrong places. They are convinced that if they look hard enough they will surely find a tail wagging this dog.
Rather than address the causes of the financial industry crisis, they chose to focus on a minor consequence of that crisis - the dramatic drop in the price of Fannie Mae and Freddie Mac stock prices. Yes, both entities were in trouble, but the falling stock price was a symptom of that trouble, not a cause! Nevertheless, congress, with great fanfare announced that they have found the culprit: a type of stock trade known as naked short selling.
To say that naked short selling is responsible for the dramatic loss of value in the shares of these two GSEs is just plain wrong. This is tantamount to saying that it rained today because I washed my car yesterday. Naked short selling may have had a collateral effect on the stock prices, but the main reason that investors are fleeing those equities is because the entities behind them are in deep financial trouble! To identify the falling stock prices as a cause and not an effect of the GSE crisis is ludicrous!
As long as there are politicians, there will be bogeymen. Since any politician's number one priority is, and always has been, getting reelected, issues that may cast a bad light on their performance or spotlight their ineptitude are guaranteed to bring quick and decisive action: obfuscation of, and diversion from, the real issue.
Perhaps the most obvious place for politicians to seek root causes and bogeymen might be the mirror.
Ninety-eight percent of the adults in this country are decent, hard-working, honest Americans. It's the other lousy two percent that get all the publicity. But then--we elected them. -- Lily Tomlin
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