The Blame Game: Set Some Rules

"Fannie and Freddie are creatures of the US government, tied into the political system, and not free market entities, like a normal private company."

This is not an accurate statement. Fannie Mae and Freddie Mac are hybrids. Part public part goverment. They are publicly traded companies. Maybe you're confusing them with Ginnie Mae?

This fault in your post destroys your whole argument.

Sent by Tom | 5:27 PM ET | 09-09-2008

I can understand Nationalization of Fannie and Freddie. What I dont understand is bailing out of IB firms like Bear Sterns? Also, if we tout rest of the world to follow American Free Market principals, then aren't we setting bad example. Couldn't govt let Wall Street firms at least go bankrupt, but just preserve GSEs.

Sent by Shailesh | 5:31 PM ET | 09-09-2008

"How much should we push commentators to defend their positions more. And how much should we just let people say whatever they think, without defending the position."

They must defend their position

Sent by tristero | 6:20 PM ET | 09-09-2008

WANT TO FIX THIS MORTGAGE PROBLEM CUT TAXES AND MORTGAGES IN HALF FOR EVERY ONE. THIS WOULD ALLOW MOST OF US TO GET THRU THIS. HOW SEVERE IS THIS MORTORGE PROBLEM? THE LONGER WE WAIT TO BE HONEST TO THE PUBLIC THE MORE WE ALL SINK IN THIS MORTAGE MIRE. CITY & COUNTRY NEIGHBOR HOODS ARE BECOMEING VACCENT AT HUGE LOSS TO THE COMMUNITY7 AND TAX BASE. WHERE DO ALL THE PEOPLE GO TO NEWLY BUILT APTS THAT ARE BOOMING. WHAT A WASTE ALL THAT VACCENT HOUSING. BITE THE BULLET NOW OR CRY LATTER.

Sent by JOSEPH DALIAN | 7:57 PM ET | 09-09-2008

A quote from an interview earlier this year,relating to the subprime crisis,"pigs get fat/hogs get slaughtered"has defined what appears to be the basis for ALL of the financial woes and issues we Americans have experienced and witnessed these months since August '08.Slushing around artificial money,creating artificial wealth and artficial clout will not bring one real job to our country,nor will it put a single piece of food on a single table.In or around the late seventies -whenever?- the assertion that the U.S.had transformed, from a manufacturing/agricultural economy to a"service"economy,is when we hit full speed ahead to our doom, with CREDIT as the vehicle to get us there.How we get back to reality is above and beyond my pay grade,but I truly hope someone can meet and answer the predicament we are in.
Incidentally,I am a registered Independent and have been for thirty plus years.I will be voting the Democratic ticket all the way this year,but there is little hope(in my opinion)that politicians of any party can wrestle us out of the mess we're in.
So,Fannie Mae/Freddie Mac,the "golden arches" of greed have finally come home to collect their loans;it is time to "pay the piper".
Good Luck to all.
Tom E.

Sent by Thomas E miller | 8:05 PM ET | 09-09-2008

Here's what the author is over looking. Fannie Mae/Freddie Mac were set up to address market inequities (re: level the playing field so to speak for large groups of Americans who have been traditionally at an economic disadvantage)in the housing sector,...right??? Well consider this,....the recurring fragility of the free market system puts enormous external pressure on these two housing agencies not designed to weather the current storm within the economy,......thus, given the historical functional mission of Fannie and Freddie one can indeed cite the over arching problems of the wider economic structure as a critical factor in the collapse of these agencies. Conservative economists are reluctant to analyze the boom years of the roaring 20s in order to see the current system's cause and effect parallels that serve to precipitate such economic collapse from time-to-time.

Sent by Gary O'Neil | 8:36 PM ET | 09-09-2008

Commentators should absolutely be encouraged, if not required, to defend their positions. It would also be useful to see how accurate each commentator has been in his past analysis.

Sent by Steve | 9:07 PM ET | 09-09-2008

Adam, 2 great reads on this subject are Robert Reich's "Supercapitalism" and Benjamin Friedman's "Age of Reckoning". Reich is the former Sec of Labor under Clinton. The first read is fascinating.

Reich argues that we now live in a world dominated by Supercapitalism, which has been developing since the mid-70s. Over the past three decades, power has shifted to consumers and investors (and away from the "citizen" in each of us). The explanation for its emergence involves "the way technologies have empowered consumers and investors to get better and better deals" because "consumers gained more choice." Prior to the 70s big business and big labor (unions) worked in tandem with the balancing force of democracy to ensure a growing middle-class, in terms both of income and of size, and achieved a "true" democratic capitalism ("true" in quotes because minorities and women were still almost entirely left out). Then, technology began to allow small firms and entrepreneurs to disrupt the delicate balance created over so many decades and achieve economies of scale that could only be had by mega-companies in the past (we now live in a world of global supply chains).

I'm going to skirt over many details to keep this shorter than a full-blown book report (which I'd be happy to write if you'd be interested). So yes, deregulation has contributed to a decrease in the checks and balances on capitalism, but of course is not the sole culprit. As I mentioned before, the consumer and investor in us has taken over how we vote. We demand low prices and immediate service and if we don't get it, we move onto another company or find a new asset management. Businesses role is to excel within the rules of the game and beat competition. Companies are no more than legal contracts. However, one of the major culprits of the further deterioration of democratic capitalism is corporate donations and lobbying in Congress. Reich states "public policy has become less and less relevant in politics."

(Again, skipping over many steps)...To begin fixing the infrastructure "we have to change the rules." This involves first to stop whining about corporate pay, companies being "immoral" (companies, as stated above, are a legal fiction made up of thousands of legal contracts existing solely to play by the rules of the game), executives being greedy, etc. Sure, there are some greedy boors out there, but blaming them won't change anything. We need to demand that the rules of the game are changed. The Yale political scientist Charles Lindblom brilliantly states "neither ethically nor logically do corporations have a legitimate role in the democratic process." Implanting this brilliant piece of pith is not easy (well, legislatively it is easy, but practically and politically speaking) and I'm not saying I know the answer (I'm only 25), but corporate money does need to be taken out of the political process entirely. People - all of us - need to start voting with the citizen in us in mind.

I'm optimistic that we may start trending towards a more balanced equilibrium between capitalism and democracy, but it will be slow.

So to answer the question about deregulation "causing" this form of capitalism, simply stated no. It contributed, but the main catalyst that brought all the various forces to fruition was technology.

You should allow people to post whatever they want because those are the rules of the game. If you start demanding full blown proofs to every statement, people will use their mouse and click on another blog - we need to change the rules of the game (long stretch, but why not).

Oh, and as for the second read by Friedman, I just started it this weekend. I shouldn't write anymore, but I can't resist! The book, written in 1988, is still valid in many ways. The "prosperity" built during the Reagan years was done so on debt, but not debt to invest in capital improvements and means of production, but rather to fund both government and consumer consumption (in other words, as Friedman states "continued gov't spending not matched by the taxes to restrain private consumption..."). We sold off our assets and began losing control over our own economic policies. As we know, this has continued. Whereas we used to be one of the largest creditors, we are now (both in the late 80s and still today) the largest debtor (trade balance and national debt), with a huge portion of our debt held by foreign companies and government. Friedman, I think in agreement with Reich, states "Economic policy, not individual behavior, has made the difference" (keep in mind that his focus is mainly on reforming fiscal policy as the solution...he is not a monetary policy advocate then, as far as I know). Etc....

One blogger pointed out that China holds about 10% of Fannie/Freddie debt, also about 10% of their GDP. This investment is one example of how our policies have become ingrained in the global fabric of capitalism. This phenomenon is a good thing. I agree with Friedman that the counter-balance must be fiscal policy, namely taxes. The 00s look a whole lot like the 80s when answering the question: how did we fund our prosperity? Debt is not a bad thing - it is the foundation of capitalism and all growing economies - but it must be used wisely and have checks and balances.

Got a little off topic but to the point of Fannie and Freddie. Many bloggers have screamed to force the executives to pay or the holders of the debt or any other group of people or companies/governments. These are not solutions. Yes, I agree that those running Fannie and Freddie were over-ambitious with many of the MBS they purchased. So be it. We must learn our lesson from this and deal with the consequences (economic and reputational as a country). The solution is not to blame executives or investors, it is to blame the infrastructure in which they were run. Again, the rules of the game need to be changed.

I'll stop there.

Sent by Ben Gordon | 9:25 PM ET | 09-09-2008

Adam - I think insisting on discourse will be essential for bringing out the value in Planet Money.

It seems the norm to go into Tribal Blame today. Is this not why the political process is deadlocked? Is this not why the regulatory environment for Freddie and Fannie could not be changed?

Is this why when the nation is confronted with issues that could destroy us that we are fussing about lipstick and who is the greater patriot?

I know that it is hard not to have a visceral reaction when confronted by a person with a different world view but we won't get anywhere by name calling or simply stating our position as a given.

When I am with deeply religious friends for instance - we have to skirt a fine line with each other but we usually do. When I am with my extreme republican friends we try hard to keep the differences in the realm of humor.

With good will and discipline discourse is possible.

I think that you can insist on good behavior and I feel strongly that such a space will become very precious.

So please try and make Planet Money a refuge for all good men and women who come together in the spirit of finding out how to cope with our frightening and complex world.

There are a myriad of echo chamber places - PM could be all but unique

Sent by Robert Paterson | 3:56 PM ET | 09-10-2008

I agree that Fannie and Freddie have been troughs for both Republicans and Democrats. But what sent them over the edge was the current housing crisis - a crisis borne of lax standards and regulations in the underwriting of mortgages. You can point a finger at the Bush administration for that. Ditto for the non-transparency of the securitization of those mortgages wallowing on the balance sheets and portfolios of banks, pension funds, mutual funds, hedge funds, etc. A more rigid framework and oversight by the Treasury or SEC in structuring derivatives would have gone a long way in avoiding our housing turmoil. Yes, it would have curtailed the mortgage activity that contributed in no small part to the housing bubble and the lush profits of mortgage agents, investment banks, and rating agencies. But look where we all landed up...

Sent by Jean Gajano | 4:41 PM ET | 09-10-2008

Adam, please push your commentators to defend their positions by backing them up with facts. Our economy appears to be so fragile right now--blaming and/or partisanship when speaking about it doesn't help us. Looking to you to de-muddle the economy for those of us who have such a thin understanding of its underpinnings and workings. Thank you.

Sent by Marilyn | 11:32 AM ET | 09-11-2008

I think requiring explanation/justification is an interesting experiment. I think you should try it out and see how it works. Once you do, you might find that it's untenable--possibly you find yourselves too close to censoring based on how good you think the arguments are, or you find you've eliminated feedback entirely.

Anyway, it's worth a shot, and then see how it goes.

Sent by Timothy | 5:09 PM ET | 09-18-2008

Thanks for your thoughtful response of Sept 9. My comment there seems without context; I was responding to one of your callers of a few minutes previous, who had asserted that the "socialist government had stolen stockholder money" when the collapsing corporations were rescued. It seemed so preposterously backwards that I just had to answer her back. Silly of me to plug my howl in the darkness into your blog, but I felt compelled to share. (I am very unpracticed at participating in these conversations.)

I think, all in all, that commentors should be pressed to give some evidence in support of their assertions. I think I'm with you on that.

On the other hand, in the instance of my Sept 9 comment, I'd have collapsed under the effort. My belief is that imprudent risk-management was self-evidently present, and tied to the politics of deregulation, for years (consider just all the mortgages soon to balloon beyond the capacity of the borrowers to pay). My belief is based on such a web of informal historic or sociological observation, and on logical analysis, that I am at a loss to "prove" my case. I'd have to write the book , and I'm not a professional in the requisite disciplines. I'm not polished at producing pithy points, either.

I'm reduced to telling you that, several years ago (after national elections), with regard to the present economic and political disasters, I found myself dismayed in accepting the electoral outcomes and saying over and over, "Okay then, by their consequences (of their policies) shall you know them." Boy, did we ever. In other words, I closely followed current events, I thought it was going this way, it did go this way (bad), and I am left with a big "who cares what you said, fella?" (After all, not only did I not say it to anyone in particular, there's not even any proof of my prescience.) (Also, in my imagination, the assumption was that you, being a well-informed guy, would naturally see it my way too.)

I thought it was irrefutably obvious that leadership was hugely imprudent in decision-making processes (and outcomes). Evidently it isn't obvious to all, and I can't prove it to them. So what? These dialogues don't have time/space for me to spell this out. I'm out crying in the wilderness. So are a lot of (other?) nuts. Shall I just keep my observations to myself? Keep down the general noise level?

Probably I should keep them to myself. My assertions of Sept 9 served no use (apart from providing you a point to illustrate). However, silencing oneself that way is close to the end of hope, and I don't want to give up all hope. That doesn't give me a childish right to be effortlessly understood, of course, but still.... Don't I make any sense?

Addendum: Altho a non-professional in finance or the larger academic sphere of Economics, I do have an unspoken quasi-professional vantage point. I believe economics is a social science, and as such a sub-discipline of anthropology. It is susceptible of analysis along lines which are generally ignored among professional economists. Professional economists are almost all concerned with the manipulation of money for gain, not in understanding how the underlying social adaptive systems work. Their predictions, therefore, are usually parochial, bound to a particular time and circumstance, and all made from positions firmly within the box. They can't think outside the box because they don't know they're there. They don't know they're actually doing anthropology without the necessary intellectual tools.

If you've read this far, I hope I haven't wasted your time. To the point, you seem reasonable in wanting people to write more substantively than to blow off steam. I want lots of the irrationalities and misfacts I hear out of these commentators to be challenged. Good luck with that, and thank you again for your thoughtful response to my previous comment.

Sent by david bockoven | 5:08 PM ET | 09-22-2008

I just reviewed this whole blog, found out I was more out of context than I had thought, and am sorry all over again for wasting time. I didn't recognize that my response was not to a (Talk of the Nation) caller, but to another written comment. I spun off into generalizations which did not address the specifics on hand. Told you I'm not used to doing this stuff. Now done doing so for the moment, as I clearly need a nap.

Sent by david bockoven | 5:34 PM ET | 09-22-2008