This is from a lecture Tom Woods gave about his book, Meltdown. Tom is an awesome presenter and makes boring topics entertaining. By the end of the lecture, you will understand exactly who caused the mortgage meltdown, the financial crisis and our current recession.

This is a Youtube playlist, so the next part will automatically start. It’s a little over an hour for the full lecture.

Don’t we wish? That’s not quite what he said. He wants to close them down and create a new housing system from scratch. Can you imagine if every time you completely screwed up at work, you just went to your boss and said “We should just abolish the disaster I created and start from scratch. I know exactly how to do it. Oh, don’t worry that I completely destroyed the company with my last attempt and kept telling you to pour more money into that disaster all the while telling you it was going great.” Here an article from the Wall Street Journal about Frank’s comments.

A top House Democrat on Friday said his committee was preparing to recommend “abolishing” mortgage-finance giants Fannie Mae and Freddie Mac and rebuilding the U.S. housing-finance system from scratch.

“The remedy here is…as I believe this committee will be recommending, abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance,” said Rep. Barney Frank (D., Mass.), the chairman of the House Financial Services Committee.

His comments initially rippled through bond markets on concerns that the government might pull away from the mortgage market. Many believe that’s unlikely and that any revamp would include continued government involvement. The government took over the companies in September 2008 as loan losses mounted.

Please. The government would never pull away from the mortgage market. It’s just another way for them to buy votes and redistribute wealth. There is only one reason that the government needs to be involved in the house financing system. That is to force the cost of buying homes for a select group of people onto the population as a whole. When I go to a local bank and get a mortgage, the bank will charge a high enough interest rate to make it worth it for them to lend me the money. If the rate is too high, I’ll pass. If I think it is just right, I’ll borrow and buy a home. We both win. No one else is forced to pay for my home.

Now, how does the government change this? Well, they artificially lower interest rates and standards to allow otherwise unqualified buyers to buy homes. The cost of money has not changed just because the government wants it to. Someone has to pay the difference between what it normally would cost to borrow at the buyers interest rate and the artificial rate the government sets. That someone is the tax payer. As with all government handouts, they spread the cost of a select few over the entire populace.

Some Republicans have argued that the companies should ultimately be reduced in size and privatized, while at other end of the spectrum, some analysts have recommended turning the companies into government agencies. But several industry groups and academics have suggested that the government is likely to continue playing at least some role in the future of the companies.

One such report came from analysts at Standard & Poor’s this past week. “It’s hard for us to imagine” how enough capital could be attracted to replace Fannie and Freddie with stand-alone private companies that would be able to offer low-cost funding for 30-year fixed-rate mortgages, the analysts wrote.

Thanks Standard & Poor’s! It’s hard to imagine because you are trapped in our currently reality. Capital will be attracted if it is rewarded properly by the market. If interest rates are allowed to be set by the market instead of being set by our economic emperors, capital will come. Of course they stipulate “low-cost funding”, which goes right back to forcing the cost on all tax payers.

Some analysts have argued that starting from scratch could create more problems than they would solve, in part because Fannie and Freddie own or guarantee around half of the nation’s $11 trillion in home mortgages. “Blue sky ideas are great, but they take a long time to happen,” said Mahesh Swaminathan, senior mortgage strategist at Credit Suisse, at a conference last month. “When you have $5 trillion of agency mortgages, you can't really orphan them.”

Here’s an idea. Don’t start from scratch. We are in a hole, so stop digging. Discontinue all future operations, and either let the current mortgages pan out (foreclose, payoff, etc) or sell off the mortgages to the highest bidder. We’ve already been screwed by the government here, so get it over with and quit dragging it out. At least then we’d be on a path to the free market. By the way, did anyone find the clause in the Constitution that says the Federal government can even be involved in housing finance. Yes Mrs. Pelosi, I’m serious.

Mr. Frank, who didn’t elaborate on forthcoming recommendations, said last month that one possible revamp could merge some functions of Fannie and Freddie that overlap with the Federal Housing Administration into the government mortgage-insurance agency.

The Obama administration said it will weigh in on how to revamp the companies—and the entire housing-finance system—when it releases its budget next month. Republicans have increasingly criticized the administration for moving to overhaul the financial sector without spelling out plans for Fannie and Freddie.

In a PBS interview on Thursday, Treasury Secretary Timothy Geithner said the legislative process to overhaul Fannie, Freddie and the housing-finance system was unlikely to begin this year. “It’s just a complicated thing to get right,” he said. “But we are completely supportive and agree completely with the need to make sure that we take a cold, hard look at what the future of those institutions should be in our country.”

via Fannie Mae, Freddie Mac Should Be Eliminated, Barney Frank Says – WSJ.com.

Thank God Geithner and Obama will weigh in on this soon. They have just been so great up to this point on economic matters.  I am sure our socialist President will come up with a great market based system, right? Be ready for a new welfare program, created from scratch by the most socialist government we’ve had in my life time.

According to a post on The Business Insider, the Treasury department gave Fannie and Freddie a blank check, so they can be as stupid as they want to be.

The Treasury snuck in another big bailout on Christmas Eve: It removed the cap on the amount of money it will provide to Fannie Mae and Freddie Mac to cover their ongoing mortgage losses. There is now no limit on how much we taxpayers will shovel down these black holes.

The move is designed to reassure Fannie and Freddie bondholders, who provide a lot of the money the companies use to support the housing market. These bondholders have now apparently been given an explicit government guarantee, in perpetuity. The move is also obviously designed to continue to prop up house prices, which, thanks to artificially low mortgage rates, are still above long-term norms.

On a more positive note, the Treasury also announced that it will stop buying Fannie and Freddie mortgages (though the Fed will presumably keep doing so). The total bailout so far is $111 billion.

The removal of the cap will further distort prices and activity in the housing market, which is now massively subsidized by government programs. It will continue to reward bondholders for being stupid. And it will likely result in additional huge losses for taxpayers.

It was obviously not an accident that the Treasury announced the plan after the market close on Christmas Eve, or that the press-release headline made the announcement sound like a mere “update.” Republicans, understandably, are screaming.

via Geithner Gives Housing Industry A Huge Christmas Present: Unlimited Fannie And Freddie Bailouts.

If you were told no matter what risky investments you made you would not take loses, would you be more risky or less? Apparently, the government thinks that removing the risk is the best way to fix these irresponsible government sponsored entities.

This must be more of the transparency of the Obama administration releasing this information on Christmas Eve, when most people are trying to enjoy time with their families. Little did they know, they were getting bent over by the government again.

The Wall Street Journal had an op-ed this morning about a case heading to the Supreme Court about the constitutionality of the “Public Company Accounting Oversight Board”, which was established to enforce Sarbanes-Oxley. While I don’t want to get into the case, because it talks about the constitutionality of the board not reporting directly to the President, which I don’t really care about, because I don’t think the board should even exist. The one paragraph that stood out to me though was the cost of this regulation on the economy.

Massive is the right word. The accounting board’s wide-open mandate—to make whatever rules “may be necessary or appropriate in the public interest or for the protection of investors”—has cost the economy nearly $1 trillion, according to a study by AEI and the Brookings Institution. The benefit is supposed to be investor protection. But despite these costs, the law did nothing to warn about the meltdown of mortgage-backed securities, much less expose Bernie Madoff or other fraudsters.

via Sarbanes-Oxley on Trial – WSJ.com.

Here we are talking about an on going crisis with higher and higher unemployment, and we have this regulation that costs the economy $1 trillion in what, 7 or 8 years. Also, let’s remember what this law was for. It was to make sure an Enron never happened again.

First, how much did the Enron collapse cost investors? According to a source on Google answers, who backs up his answer with citations, it was somewhere around $60 billion. OK, so here we are with another moronic government law. Because someone committed fraud, which was already a crime, they pass another law that costs the economy $1 trillion. There was a crime committed. What don’t they get is that laws don’t stop criminals. It only gives you a means to punish them after the fact.

Second, did this law that cost our economy $1 trillion stop fraud? No, as we all know, the government sponsored entity, Fannie Mae, committed accounting fraud. Who has been tried for that? Also, it did nothing to prevent Madoff or any of the other disasters that just occurred in the “crisis”. Guess what? Ponzi schemes are illegal (well except gov’t ones), and guess what? It did not stop Bernie Madoff or any of the other guys currently in the news for Ponzi schemes.

The government needs to quit with these stupid laws. If fraud is illegal, then prosecute people who commit fraud. You don’t need additional laws and regulations that cost us trillions of dollars. Even better, get rid of the SEC, insider trading laws, etc. If people knew they had to be more careful with investing, because the knew the government wasn’t going to protect them, which they don’t anyways, they would make better investing decisions. If they didn’t, it’s their own damn fault. I’m sure if insider trading wasn’t illegal, there would have been some transactions, insider sell-offs, shorts, puts, etc that would have alerted investors that something was up with Enron, and it wouldn’t have cost the economy $1 trillion.

Fannie Mae announced a new “deed for lease” program, where they will take your deed and rent your house back to  you if you don’t qualify for a loan modification and can prove you can’t pay your mortgage. They will sign a one year lease with the current owners. They are hoping they can then sell off the houses a year from now, when they assume the housing market will be better and the value of the homes will be higher. This is some pretty optimistic thinking from a now government owned institution.

What would make them think the housing market is going to pick up that much over the next year. So far, unemployment continues to rise. The Fed has been busy at the printing press, and the government is taking debt levels into unknown waters. More than likely if the economy begins to pick backup, we are going to have massive inflation. That will lead to two scenarios. Either we’ll have hyperinflation that makes the 70s look like child’s play, or we’ll have a Fed induced recession to bring inflation under control. Neither scenario paints a pretty picture for a booming housing market.

Fannie Mae and Freddie Mac (Freddie is already doing something similar) are only delaying the inevitable. The market is much smarter than the government is. It will take into account that these government institutions have a ton of inventory being hidden from the market, what analyst call “shadow” inventory. If the housing market begins to pick up, it will be driven back down with this excess inventory. Instead, Fannie should take the short term pain and end it quick.

Because of Fannie’s mistakes it is asking the government (me and you) for another $15 billion after a quarterly loss of $18.9 billion. In total, it’s estimated that we will have wasted $200 billion on both Fannie and Freddie by the time this mess is over. Then again, we know how reliable government estimates are. So far we have handed over $61 billion to Fannie, and estimates are that Fannie is sitting on inventory around 65,000 homes.

Instead of becoming landlords, why doesn’t Fannie and Freddie sell of packages of houses as investment bundles. This would get the houses off their books, and it would bring them back into the free market where they can begin to stabilize the market. Investors will buy theses homes, and guess what they’ll have to do? They have to pay taxes on their profits, which ultimately will help with the government losses that will occur with the sale. With the investors holding properties, they will want to drive prices up. They’ll either rent them out, which investors are better at than the government, or they will fix up the homes and put them back on the market. Investors will not shoot themselves in the foot by flooding the market. They will slowly bring the houses onto the market to maximize sale prices and make the most profit. Whether renting or selling, the investor will be paying taxes on his capital gains.

The government should just take the short term pain of selling them off now? This may hurt the housing market, but it will be over and stabilization can begin. Instead, the government is prolonging this crisis and making it worse, and who’s going to eat this mess? We are.