Tim Pawlenty's maiden presidential policy speech includes what can only be described as a plot to destroy the world. Seriously.
Pawlenty:
"If you can find a good or service on the Internet, then the federal government probably doesn't need to be doing it…The post office, the government printing office, Amtrak, Fannie [Mae] and Freddie [Mac], were all built in a time in our country when the private sector did not adequately provide those products. That's no longer the case."
Ah yes, government by Google. Why didn't I think of that?
It's easy to poke fun of Pawlenty at this–his argument can easily be extended to disbanding the Army since we can hire mercenaries on the net and not pay health and retirement benefits. And while, I can't comment on the post office or the GPO, but the Amtrak charge is ridiculous. The last time I checked, the only way I can ride a train from Washington to NY is via Amtrak. There aren't any other intercity passenger lines around here. Yes, I could scotch tape together a bunch of local commuter rail rides [which as Stephen Lubben notes are probably not private entites], but that's a pretty clear case of the private sector not adequately providing passenger rail transit. And even if the market were transportation generally, the auto transit market is government supported (bailouts + highway construction) as is the air transit market (bailouts and further gov't support for airport construction). I could fill up several blog posts on the US railsystem, but that's not really our topic on this blog.
But what's really dangerous about Pawlenty's speech is what he says about the housing market. Privatizing it (1) isn't possible and (2) attempting to do so would destroy the US economy, plunging us into far worse state than in 2008.
Let's consider the implicit argument here for privatizing Fannie and Freddie. I get the ideological appeal. Get government out of the housing market and avoid the politicization of lending. But is a private housing market possible? We've never had a private housing market in the US.
In the first century of the Republic, government land grants were a huge boon to anyone looking for housing. A few dollars and lots of sweat equity got you a house. The government got into housing in a major way with WWI construction of housing for war industry workers and then went into overdrive in the 1930s. We simply don't have any basis for believing that there can be a completely private housing market in the US.
Outside the US every developed country's housing market is either explicitly or implicitly government supported. (I'm expecting the Denmark fans to come after me on this in the comments. Given that the Danish mortgage bond market is larger than the Danish government debt market, do you really think the Danish government would allow the mortgage bond market to collapse?) Housing is just different from other assets–it's socially central, it's critical consumption, and it's a huge consumer investment class. That combination makes it a market that no government in the world can allow to go in the crapper.
But putting history and international comparisons aside, let's look at the current situation in the US. Pawlenty is claiming that the private sector is adequately providing housing finance today. That's demonstrably wrong. Let's recall that this private sector collapsed dramatically in 2008. Since then, over 90% of mortgage originations have been guaranteed by the government via FHA/VA/GNMA, Fannie, and Freddie. If you add in the balance sheet mortgages of the too-big-to-fail banks, there's very almost no mortgage origination being done by the private sector.
Absent government support for the housing market, the US and the global economy would have gone off the cliff. If there's no funding for mortgages, then home prices plummet. And that hurts the entire construction industry, realtors, and local government, just for starters. Has Pawlenty thought this through at all or is he just taking marching orders from the damn-the-torpedos-and-inconvenient-facts faction that seems to dominate the WSJ editorial page and the AEI? Who's advising him on this?
And then let's get down to the elephant in the room. Currently there's $5 trillion in investment in the US housing market. That's primarily interest-rate risk investment, not credit-risk investment. Investors in Ginnie Mae, Fannie Mae, and Freddie Mac MBS and bonds do not see themselves as taking on credit risk, just interest rate risk.
There's no way that $5 trillion in interest-rate risk investors will be transformed into credit-risk investors any time soon. Investors in Ginnie Mae, Fannie Mae, and Freddie Mac paper have never seen themselves as credit risk investors. Same story for those investors in AAA-rated private-label mortgage-backed securities (>90% of private-label MBS) before 2008. Basically, there's only a very small pool of private risk-capital willing to assume credit risk on US mortgages, and certainly not enough to fuel the current needs of the housing market, much less with population growth and housing price recovery.
Unless Tim Pawlenty knows how to do a Google search that will turn up $5 trillion in credit-risk investors eager for US mortgages, he ought to come up with a better proposal for US housing market reform. Because pursuing a reckless, ideologically-driven privatization plan will destroy the US economy.
Comments
17 responses to “Tim Pawlenty’s Plan to Destroy the World”
Why is it the government’s job to ensure you are able to ride a passenger train from Washington to NY?
Is your fare covering the entire cost for your train ride?
Probably not since Amtrak is losing money.
Maybe that’s the problem.
Maybe you should take care of your own transportation without much government involvement.
Amtrak should charge as much as necessary to eliminate all taxpayer subsidies and if you find their fares unattractive they might be found to be unnecessary.
I am not a Pawlenty apologist, but the government does too much. Wastes too much. Spends too much. People get used to being able to take advantage of something the government does much worse than private industry might. Maybe Pawlenty just wants government services to pass a reasonableness test, and if found those services can be provided better or cheaper by private industry that might be the way to go.
Not that everything should be outsourced. But heck, passenger trains? I have never been on one, but my taxes are probably subsidizing some.
If Pawlenty wants to stop subsidizing services that cost too much and benefit few, I am for looking at that stuff. Spend the tax money on something the government does well, or that no private organization does, like wage war, as you mentioned.
@Steevo
Your taxes probably subsidize a bunch of things you neither use nor like. The same goes for me. It’s called “living in society.” I rode the trains pre-Amtrak, and they were pretty grim. And the private railroads don’t want them back. That leaves the government.
Knute, maybe so.
Perhaps Pawlenty wants a stop to that. And no, providing subsidized rail transportation for certain people is not called “living in society”.
If not for that train would you or Adam have to stay home? I don’t think so.
There are likely many options for transportation that don’t require subsidies by the taxpayers that would be able to get you to your destination. Why not save the money and pay for your own transportation. Buy a car that’s cheap on gas. Ride a bike. Hitchhike. Get a ride with a friend. Take a private bus.
You all seem to have missed the point that the automobile industry is not without far more government subsidy than Amtrak. Leave out the recent bailout, the auto industry depends on the federal, state, and local governments for roads and other infrastructure totaling in the high billions and dwarfing the Amtrak subsidy. Just look at the interstate highway system, no other government subsidy comes close. And I haven’t even gotten into oil subsidies, which also affect the auto industry, as the two are really one. If we gave even a portion of this vast support to Amtrak and commuter rail, they would be far less expensive to ride, much more efficient at moving people around the country, and would seriously compete with the auto industry at all levels, local, regional, and cross-country. Such a system would be more energy efficient, very safe, a more social way to travel, plenty of reasons to do it, so why don’t we? Burden of explanation is on you, folks…
Jered,
The highway system is funded by gasoline taxes. Auto manufacturers don’t pay gasoline taxes, they are paid by, automobile owners.
Oil subsidies are also paid by the same automobile owners, not by the auto manufacturers.
As to passenger rail transportation, out here in the west things are so spread out public transportation of all types is a huge government subsidized failure. There are possible exceptions in other parts of the country, Manhattan, NY maybe.
But mostly passenger rail could not exist without taxpayer subsidies. The voters in California inexplicably passed a huge subsidy for a high speed train, and it goes from nowhere to nowhere and costs billions. Without the subsidy it wouldn’t be built at all. And I’d be for stopping it and not building it at all.
Your argument is way less than half baked.
Goodness, Adam, I really don’t understand what you’re talking about in this post.
You start by essentially arguing that because government does something (like support rail travel), it must do that activity. Lovely logic, my friend.
As evidence of this involvement, you make repeated references to “bailouts.” But again, the existence of bailouts doesn’t imply that such involvement is an inherent function of government. Instead, it’s a government role that happens to have been invoked in the last few years. And one could argue about the wisdom of that particular form of involvement, given the cost, inevitable moral hazard, etc.
You then argue that there’s something special about housing that necessitates government involvement. This logic is embodied in your statement that:
“Housing is just different from other assets–it’s socially central, it’s critical consumption, and it’s a huge consumer investment class. That combination makes it a market that no government in the world can allow to go in the crapper.”
Ummm, ok. To begin with, I suspect that people could make arguments of the same sort about lots of industries that are important to them. Autos? (Heck, we bailed them out!) Oil? Fill in the blank with your favorite big industry?
Ultimately, your arguments for government involvement don’t reflect anything that would usually be thought to require government intervention. The typical reasons would be, in no particular order, externalities, public goods, market power/natural monopoly, and asymmetric information. These are the standard market failures that would necessitate government intervention. But I’m not sure how being a “big” sector causes one to conclude that a market failure exists.
You conclude with the “elephant in the room”:
“Currently there’s $5 trillion in investment in the US housing market. That’s primarily interest-rate risk investment, not credit-risk investment. Investors in Ginnie Mae, Fannie Mae, and Freddie Mac MBS and bonds do not see themselves as taking on credit risk, just interest rate risk.”
I’m not sure what this statement even means. I do agree that there’s interest rate risk associated with anyone who buys securities based on the US housing market, but what are you talking about with respect to credit risk? The fact that things are rated AAA? Suddenly, we’re putting a lot of stock in the credit rating agencies (which, I can assure you, the investors are not doing)?
As I said at the outset, I just don’t understand what you’re talking about in this post.
Chabot, it’s been a while since you’ve commented. I’ve missed you. And as usual, you’re misrepresenting my argument. Of course “does” doesn’t mean “must.” My statement here is “should” therefore “does.”
So about that “should.” Why should the government provide rail transport or secondary housing finance markets? For me it’s simple–because they are social welfare enhancing and the private market hasn’t/won’t.
My analysis of the role of government starts from a totally different standpoint than yours. You assume that the normal state of nature is no government and that government should only be involved in human affairs when particular conditions arise-externalities (I assume you mean negative externalities, not positive), public goods, info asymmetries, monopolies.
That analytical approach is wrong because it fails to recognize that private interaction on any basis other than violence cannot exist without government. The public-private dichotomy on which it is premised simply doesn’t exist. There isn’t a binary division of public and private, but a spectrum of various types and levels of government involvement. For example, the basic building block of what you would term private behavior–contract–requires government to exist. Absent government, contract performance is optional, which seriously impedes contracting. Even the Mogadishu arms bazaar has some government involved–the warlord in charge has a monopoly on violence and decides what the rules are going to be in the bazaar. Government is always involved; the only question is how.
Indeed, consider what the US economy would look like with no federal spending. The defense sector, the higher education sector, the transportation sector, and the agricultural sector would barely exist. We wouldn’t have the Internet. The financial sector would also be in huge trouble because of lack of market confidence absent a credible regulatory regime.
My analysis starts from the assumption that government exists in every form of human society. The goal of social organization should be to maximize social welfare (and we might disagree on what that is). Achieving that end can require different forms of government involvement depending on the issue at hand.
When the availability of a product has social welfare benefits, but the private market does not provide it, that seems like a pretty clear case where government should provide it. The government should provide social welfare maximizing services that private parties will not provide or will not provide fairly (that starts to be your monopoly exception).
Thus, in 1934 no private capital stepped up to provide a secondary housing market when the federal home mortgage association charter was made available. No one took it. In 1938, the government filled the void with Fannie (a RFC sub at first). That same situation exists today. There have been all of about 2 private securitization deals since 2008. The private market isn’t filling the void. Same story with rail transit. Do you know of any attempts to create private intercity rail passenger services going on? (I hope there’s no argument that intercity rail transport is a pretty clear social welfare benefit.)
Housing is demonstrably different from other sectors. If US auto manufacturers failed, there’d be a lot of social pain, but we’d still have cars (just imports). If the oil industry failed (as it did in the late 1980s) we’d still have gasoline. But without housing finance, we won’t have much of a housing market. Consumers generally buy homes on credit, and depository lending isn’t sufficient to finance the US housing market unless we saw an enormous devaluation. And that would wipe out huge savings and the banking system. Yes, people will have roofs over their heads, but the labor market disruption and loss of savings from a collapse of the housing market could not be paralleled with the failure of any other industry.
Finally, the elephant in the room. I might not have been clear on this. There’s about $5T of investment in the US mortgage market. Most of this is via the GSEs and Ginnie Mae. Anyone who invests in Ginnies or Fannie/Freddie MBS or Fannie/Freddie bonds understands that they are taking on interest rate risk. But these investors don’t think that they are taking on credit risk. They (correctly) understand GSE paper as US government paper.
The same story was true pre-2008 for most investors in private-label MBS. Most private-label MBS of those were AAA-rated, and the investors who bought AAA-rate private-label MBS didn’t really think of themselves as taking on credit risk with US mortgages. Of course they were in fact, but that’s not what they thought they were buying. Would a Chinese investment fund or a Norwegian pension plan really want to gamble on US mortgage credit risk? That’d be nuts. Those investors knew that they didn’t have the information to do this. Instead, they assumed (wrongly) that AAA-rating meant that they weren’t taking on credit risk, just interest rate risk, which was something they knew how to handle. These were investors who wanted what Gary Gorton terms “informationally insensitive” securities–rate risk, not credit risk.
Bottom line here is that there has never been much appetite from capital market investors to assume the credit risk on US mortgages, only the interest rate risk (prepayment speed). That’s unlikely to change any time soon. Which means that privatizing the market would result in the loss of some $5T in capital because those investors won’t want to buy private-label MBS that lack a government guarantee. And that will sink the country.
Steevo–
I think you’re on a very different page than Pawlenty. You’re arguing for subsidizing projects that are cost and social welfare efficient. As you put it, “stop subsidizing services that cost too much and benefit few.” That’s a call for project-by-project analysis. That’s not what I hear in Pawlenty’s speech. It wasn’t make government more efficient (I’m all for that), but an assertion that government shouldn’t be involved in large sectors of the economy. My concern is that simply produces a situation in which there is no service provided, period. I feel pretty confident that would be the case in 2 of his 4 examples. I don’t know enough about the GPO or USPS to venture a comment.
Adam,
One thing you mentioned in your missive to Chabot. Housing hasn’t been as cheap as it is now in some time. This has resulted in a wealth (asset) transfer from the public to wall street of a very large amount.
Many (maybe most) people’s wealth has been wiped out, wealth that was in their home, or in mutual funds or retirement accounts. Gone.
Those MBS you mentioned are empty as you know. They have nothing behind them, there are no mortgages in them, as far as I can tell.
This has all happened because of fraud by the big wall street firms which unfortunately are apparently no longer partnerships, with partners on site every day. Now they are probably public companies and their managers will do anything to assure their bonus this year, even if the company fails next year.
And you know all this is true. I think you have written about it. Recently.
As to depository lending being inadequate to finance home purchases, that’s the problem. Banks aren’t being banks anymore, they are more like money changers. No wonder our money is worthless nowadays. Inflation. But real estate *is* devalued now. Worthless.
As to your response to me, I am not for subsidizing much of anything.
I think as a Georgetown law professor you should not be financially dependent on government for your transportation. You should not need Amtrak subsidies to get from place to place. You probably make enough money to take care of your transportation needs for yourself. If not that’s what you should work on.
@steevo
If you’re doing anything but walking, you’re using tax supported transportation. I don’t know where you got the fairy tale that fuel taxes pay for the road system, but it isn’t true. Part of it, yes, but nowhere near all of it. As for your alternatives: This country has one OTR bus company left, and the number of towns it serves has dropped precipitously; I already drive a cheap car, and it’s still cheaper for me (and a lot of other people, not just “certain people”) to take the train into town, not to mention the reduced pollution; I have no plans for interstate bicycle trips, and riding a bike into town in a suit is impractical; and I have to assume you’re joking about hitching.
“That analytical approach is wrong because it fails to recognize that private interaction on any basis other than violence cannot exist without government.” Really? I’ll concede that government is necessary to prevent *some* interactions from being based on violence, but that is a far cry from saying that all private interactions will be based on violence in the absence of government.
You can private arbitration services on the internet. Mr. Pawlenty would therefore presumably abolish the federal courts. Beach time for me!
This post has nothing to do with debtors and creditors as far as I can tell.
To argue that “rail transport” is “social welfare enhancing” and “the private sector can’t / won’t provide it” is to argue multiple high-level generalities that don’t have a lot of factual support when you get down to specific cases and measure alternatives. Of course a blog comment is not the place to identify each real world departure from the Platonic ideal. There is extensive research by Randall OToole at Cato that is heavily documented from government statistics that debunks the proposition that any rail system enhances welfare, unless you think running something that is underused even with subsidies and too expensive to pay for itself otherwise is a welfare enhancement. Peter Gordon, a professor of urban policy, hits this topic over and over on his blog as well. As for the idea that the “private sector “can’t / won’t provide it”, well, if it’s a bad idea, then of course the private market is making a better decision than government so should be applauded. We don’t seem to have a problem transporting people in this country and rail expenditures are probably among the least needed in the budget.
I say all this as someone who has taken mass transit, mostly in the form of trains, for his entire adult life, and quite likes it. But it’s a poor, poor, poor case for subsidies.
@Bankruptcy Judge:
We could probably outsource the judicial system to India. Where exactly does PACER physically reside anyway…
“Hi, I’m ‘Jason’ and I will be your bankruptcy judge today. How is it that I can help you?”
“I would like you to sanction the hell out of Creditor X. They have illegally rendered and incarcerated Debtor, my client and a U.S. citizen, in a secret corporate prison in the Carpathians. I think they’re harvesting his organs.”
“Okay, so you would like Sanctions, is that correct?”
“Yes.”
“Okay, excellent. Can you hold for just a moment please?”
Adam —
Are you saying government subsidization is necessary for home construction, or home ownership? Do you believe that if we eliminated all policies that favor home ownership that people would live in the streets because entrepeneurs would not finance and develop rental housing? Do you believe home ownership is so much better than home renting that we should go through a financial crisis every 25 years or so because of the bubble effects created by the subsidy policies?
Mr. Levitin can’t help himself.
Frankly, this post is ridiculous, which is usually the result when normally erudite and thoughtful professors try to tie their politics into their arguments.
TEH WURLD WULD END IF TEH GOVERMINT STOPS DOOING REZIDENTIAL MORGAGE LOAANZ
AND REPUUBLIKANS ARE TEH EVUUL
And at last we have the Tea Party chiming in in the person of oyez.