Wednesday, September 17, 2008

GSEs and failures

One the big arguments I see coming out against the Fannie Mae bailout among the more "fringe" group of people (IE, the libertarians) is that the Fannie Mae bailout largely wouldn't affect normal people. Since it wouldn't affect normal people, we shouldn't even worry about Fannie...especially because bailing out Fannie requires taxing the normal people!

Leaving aside how the tax burden actually falls on the population by income bracket, let's look at how Fannie interacts with the "real economy."

Fannie's primary purpose is purcahse mortgages from banks, pacakge them into mortgage-backed securities, and sell them to big-time investors. The function is pretty important in the modern economy. Big investors being able to buy simple securities instead of a hodgepodge of loans means capital infusions into residential real estate, meaning basic people can afford to buy loans...especially in an era when Americans themselves don't save much money anymore.

So, eliminating Fannie=making a lot tougher for normal people to get loans, just based on sheer capital available.

But what about liquidity? Fannie provides liquidity to local banks. Rather than having 30 year assets on their balance sheets, banks can instead have money to make more loans, either to other home buyers or to local businesses. This means a greater amount of money being invested back into the community. That means more local barber shops, more local restaraunts, and more local 7-11s. And it's being enabled, in part, by Fannie Mae.

Those are two very real effects that Fannie Mae has on the "real economy."

Hence, yes, Fannie Mae matters to everyone.

But what about the cost?

But who's actually paying, and who's actually benefiting?

For one, common stockholders aren't, and have been entirely wiped out. The people benefiting are China, big investors, and other big banks that bought preferred stock and mortgage-backed securities. Also benefiting is everyone who is buying a home, or possibly thinking of buying a home, or even renters (since more homeowners should mean less competition for rent). IE, everyone kind of benefits. This might be a bias against wealth, since the least wealthy are the ones most likely to be unable to afford higher interest rates. The least wealthy also are hurt the most when the economy slows down.

Who actually pays the tax burden?
Welly, by and large, two thirds is derived from corporations and income taxes. Taxes on corporations largely hurt corporations and those that own stock/bonds most directly. So that's a bias against wealth, on average

Let's look at income taxes.
Look at Page 22
As we can see, the wealthiest, obviously, shoulder most of the tax burden. The lowest 20% pay almost nothing, and the next 40% pay less than $10,000 annually. And that's just in taxes. Using slightly rounded numbers, the bottom 60% shoulder 28.8% of the tax burden, or $58 billion in this plan. Assuming 100 million households, that's a bit shy of $1 grand per household.

I think a one time payment of $1,000 is well worth lower interest rates. ;)

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