Daniel Gross: FDR is saving us again
[Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at moneybox@slate.com. He is the author of Pop! Why Bubbles Are Great for the Economy.]
In the 1930s, Franklin Delano Roosevelt saved American capitalism from its own self-inflicted wounds by erecting a new financial infrastructure—often over the vociferous opposition of the bankers and investors whose poor judgment had helped precipitate the Great Depression. During the New Deal, the government reacted to a disastrous systemic failure by creating the sort of backstops, insurance, and risk-spreading mechanisms the market had failed to develop on its own, such as deposit insurance, federal securities registration, and federally sponsored entities that would insure mortgages.
Despite sustained efforts to tear down the New Deal—from the repeal of the Glass-Steagall Act in 1999 to President George W. Bush's ill-fated 2005 efforts to dismantle Social Security—the 1930s-vintage infrastructure has proved remarkably durable. And this crisis has elicited new experiments in policy, just as the Great Depression did. The Federal Reserve has been systematically lowering its standards for what it will accept as collateral for loans. This week, Hillary Clinton called for a national panel to recommend solutions to the housing morass. (She said the group should include former Federal Reserve Chairman Alan Greenspan, which is a little like Chicago appointing a cow to a panel on preventing disastrous fires.) But as the nation once again confronts a systemic failure in housing and housing-related credit, the Bush administration is going back to the future, using New Deal-era agencies as the cornerstone of its response.
Although the Tennessee Valley Authority has yet to pitch in, four 70-year-old agencies are helping to cushion the blow of the housing bust. Let's count them.
1. The Federal Home Loan Bank system. Last year, the model of originating and securitizing mortgages began to break down in the wake of the subprime debacle. Mortgage companies that relied on the capital markets (rather than deposits) to raise the money for mortgages suddenly found themselves starved for cash. Many of them turned to the FHLB, which was created in 1932 (so let's give that one to Herbert Hoover) and provides capital to lenders. Indeed, had it not been for the FHLB, it's possible that the nation's largest mortgage lender, Countrywide Financial Corp., might have gone under. Sen. Charles Schumer, D-N.Y., noted last fall that Countrywide borrowed a whopping $51.4 billion from the Atlanta FHLB as its troubles mounted. On Monday, the FHLB pitched in again, relaxing regulations on member banks to allow them to double the number of mortgage-backed securities issued by Fannie Mae and Freddie Mac that they can hold on their books for the next two years. The FHLB noted that this measure could allow member banks to purchase more than $100 billion worth of such securities....
Read entire article at Slate
In the 1930s, Franklin Delano Roosevelt saved American capitalism from its own self-inflicted wounds by erecting a new financial infrastructure—often over the vociferous opposition of the bankers and investors whose poor judgment had helped precipitate the Great Depression. During the New Deal, the government reacted to a disastrous systemic failure by creating the sort of backstops, insurance, and risk-spreading mechanisms the market had failed to develop on its own, such as deposit insurance, federal securities registration, and federally sponsored entities that would insure mortgages.
Despite sustained efforts to tear down the New Deal—from the repeal of the Glass-Steagall Act in 1999 to President George W. Bush's ill-fated 2005 efforts to dismantle Social Security—the 1930s-vintage infrastructure has proved remarkably durable. And this crisis has elicited new experiments in policy, just as the Great Depression did. The Federal Reserve has been systematically lowering its standards for what it will accept as collateral for loans. This week, Hillary Clinton called for a national panel to recommend solutions to the housing morass. (She said the group should include former Federal Reserve Chairman Alan Greenspan, which is a little like Chicago appointing a cow to a panel on preventing disastrous fires.) But as the nation once again confronts a systemic failure in housing and housing-related credit, the Bush administration is going back to the future, using New Deal-era agencies as the cornerstone of its response.
Although the Tennessee Valley Authority has yet to pitch in, four 70-year-old agencies are helping to cushion the blow of the housing bust. Let's count them.
1. The Federal Home Loan Bank system. Last year, the model of originating and securitizing mortgages began to break down in the wake of the subprime debacle. Mortgage companies that relied on the capital markets (rather than deposits) to raise the money for mortgages suddenly found themselves starved for cash. Many of them turned to the FHLB, which was created in 1932 (so let's give that one to Herbert Hoover) and provides capital to lenders. Indeed, had it not been for the FHLB, it's possible that the nation's largest mortgage lender, Countrywide Financial Corp., might have gone under. Sen. Charles Schumer, D-N.Y., noted last fall that Countrywide borrowed a whopping $51.4 billion from the Atlanta FHLB as its troubles mounted. On Monday, the FHLB pitched in again, relaxing regulations on member banks to allow them to double the number of mortgage-backed securities issued by Fannie Mae and Freddie Mac that they can hold on their books for the next two years. The FHLB noted that this measure could allow member banks to purchase more than $100 billion worth of such securities....