3 thoughts on “The present – and the future? – for Fannie Mae and Freddie Mac”
Note, in this context that the Franklin Raines the author mentions as having received over $90 million in compensation over six years running Fannie Mae, is the same one who Armando Falcon was warning about in his 2004 report.
What find interesting is how the federal government has tried to deal with Fannie Mae and Freddie Mac. After Fannie Mae and Freddie Mac were seized by the government at the height of the financial crisis in 2008, they have drawn a total of $188 billion in taxpayer funds to stay afloat, while paying more than $45 billion in dividends. At the start of next year, the unlimited support the Treasury extended to the two companies will expire. After December 31, Fannie Mae’s bailout will be capped at $125 billion and Freddie Mac will have a limit of $149 billion. In sum, the federal government is tightening its reins on Fannie Mae and Freddie Mac such that the federal government will provide less and less support to Fannie and Freddie as we move forward.
I have another thought. Although economists disagree on what got us into this financial crisis, most economists agree that the subprime mortgage crisis is part of the reason for the financial crisis of 2008. I am interested in what the federal government is doing to get us out of this financial crisis. The Federal Reserve is playing the leading role in getting us out of this financial crisis. The Fed is in charge of setting the monetary policy for the U.S. In the past, the Fed uses three traditional tools for monetary policy: (1) reserve requirements, (2) the discount window, and (3) open market operations. These traditional tools are no longer helping the situation because (1) the Fed can’t lower interest rates any further – the Fed cannot set the Target Federal Funds Rate any lower since the Effective Federal Funds Rate is at its effective lower bound; and (2) reserve requirements will not work because banks have surplus reserves. The Fed is now using non-traditional tools for its monetary policy. The Fed is using two main non-traditional tools of monetary policy: (1) the Fed’s balance sheet tools and (2) public communication. For the balance sheet tools, the Fed purchases assets from the market. The FOMC has focused on the acquisition of longer-term securities, specifically Treasury and agency securities (issued by GSEs), which are the principle types of securities that the Federal Reserve is permitted buy under the Federal Reserve Act. With the space for further cuts in the target for the federal funds rate limited, the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). The FOMC announced a program to purchase a total of $1.25 trillion in agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt. For the public communication tools, the FMOC is trying to repeatedly communicate to private markets what the Fed plans on doing with interest rates. For example, the FOMC has made statements that economic conditions “are likely to warrant exceptionally low levels of the federal funds fate for an extended period” (through 2014). The bottom line is that we are in unchartered territory. The Fed does not know for certain whether these non-traditional tools of monetary policy will work or fail.
The second link is an FOMC statement from the Board of Governors of the Federal Reserve’s website illustrating the public communication tool of monetary policy. These FOMC press releases communicate to the members in the financial markets what the Fed is currently doing and plans to do in the future: http://www.federalreserve.gov/newsevents/press/monetary/20130320a.htm
Note, in this context that the Franklin Raines the author mentions as having received over $90 million in compensation over six years running Fannie Mae, is the same one who Armando Falcon was warning about in his 2004 report.
What find interesting is how the federal government has tried to deal with Fannie Mae and Freddie Mac. After Fannie Mae and Freddie Mac were seized by the government at the height of the financial crisis in 2008, they have drawn a total of $188 billion in taxpayer funds to stay afloat, while paying more than $45 billion in dividends. At the start of next year, the unlimited support the Treasury extended to the two companies will expire. After December 31, Fannie Mae’s bailout will be capped at $125 billion and Freddie Mac will have a limit of $149 billion. In sum, the federal government is tightening its reins on Fannie Mae and Freddie Mac such that the federal government will provide less and less support to Fannie and Freddie as we move forward.
Here is the article:
http://www.reuters.com/article/2012/08/17/us-usa-housing-idUSBRE87G0EN20120817
I have another thought. Although economists disagree on what got us into this financial crisis, most economists agree that the subprime mortgage crisis is part of the reason for the financial crisis of 2008. I am interested in what the federal government is doing to get us out of this financial crisis. The Federal Reserve is playing the leading role in getting us out of this financial crisis. The Fed is in charge of setting the monetary policy for the U.S. In the past, the Fed uses three traditional tools for monetary policy: (1) reserve requirements, (2) the discount window, and (3) open market operations. These traditional tools are no longer helping the situation because (1) the Fed can’t lower interest rates any further – the Fed cannot set the Target Federal Funds Rate any lower since the Effective Federal Funds Rate is at its effective lower bound; and (2) reserve requirements will not work because banks have surplus reserves. The Fed is now using non-traditional tools for its monetary policy. The Fed is using two main non-traditional tools of monetary policy: (1) the Fed’s balance sheet tools and (2) public communication. For the balance sheet tools, the Fed purchases assets from the market. The FOMC has focused on the acquisition of longer-term securities, specifically Treasury and agency securities (issued by GSEs), which are the principle types of securities that the Federal Reserve is permitted buy under the Federal Reserve Act. With the space for further cuts in the target for the federal funds rate limited, the Federal Reserve initiated a series of large-scale asset purchases (LSAPs). The FOMC announced a program to purchase a total of $1.25 trillion in agency MBS, up to $200 billion of agency debt, and up to $300 billion of longer-term Treasury debt. For the public communication tools, the FMOC is trying to repeatedly communicate to private markets what the Fed plans on doing with interest rates. For example, the FOMC has made statements that economic conditions “are likely to warrant exceptionally low levels of the federal funds fate for an extended period” (through 2014). The bottom line is that we are in unchartered territory. The Fed does not know for certain whether these non-traditional tools of monetary policy will work or fail.
I have posted two links.
The first link is Bernanke’s 2012 Jackson Hole Speech from the Board of Governors of the Federal Reserve’s website demonstrating that the Fed has been using non-traditional tools of monetary policy:
http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm
The second link is an FOMC statement from the Board of Governors of the Federal Reserve’s website illustrating the public communication tool of monetary policy. These FOMC press releases communicate to the members in the financial markets what the Fed is currently doing and plans to do in the future: http://www.federalreserve.gov/newsevents/press/monetary/20130320a.htm