taxpayers

Another Reason Why Fannie Mae and Freddie Mac Need to Go

by Alex Schibuola on October 26, 2010

in Bailout Watch, Economy

The monthly payments a home mortgage has depend on two variables (among others): the initial down payment and interest rates. A larger down payment means a lower mortgage balance; this results in lower monthly payments. Lower interest rates lead to lower monthly payments.

A 2006 study by Fannie and Freddie finds that, by virtue of their existence, homeowners pay 30 basis points (bps) less on interest rates (e.g., a 5 percent interest rate = 500 bps).* The study also highlights how they permit greater homeownership by offering mortgages that require lower down payments. Further, they “estimate the total savings to homeowners from Freddie Mac and Fannie Mae activities reach the $18.8-26.9 billion range.”

That’s an interesting number. But what does this mean for an individual homeowner? I created an amortization table to see:

In World A^, without Fannie and Freddie, a homeowner purchases a $200,000 home with a $40,000 down payment and takes out a $160,000 mortgage with a 5 percent interest rate.

World A monthly payment: $858.91

In World B^, with Fannie and Freddie, a homeowner does the same as in World A, except he or she pays a 4.7 percent interest rate instead (30 bps lower because Fannie of Freddie exist).

World B monthly payment: $829.82

In World C^, with Fannie and Freddie, a homeowner purchases the same home with a lower $20,000 down payment and takes out an $180,000 mortgage at a 4.7 percent interest rate.

World C monthly payment: $933.55

Between World A and World B, which have different interest rates but the same down payment, the homeowner saves $29.09 per month ($349.09 per year). This is ludicrous. At the individual level, one cannot justify saving $29 per month after incurring losses of hundreds of billions of dollars at the expense of all taxpayers.

Between World A and World C, our prospective homeowner is actually worse off because of Fannie Mae and Freddie Mac. Because the down payment is smaller, the mortgage balance is larger thus increasing monthly payments. The homeowner ends up paying an extra $74.64 per month ($895.68 per year) because of Fannie and Freddie. This is super-ludicrous.

Not to be naïve, the homeowner in World C, might not be a homeowner at all, because he or she may not be able to raise $40,000 to buy a home in today’s World A. However this person would be better off renting and saving up for a down payment in the future. In either event, given that the micro-level effect of Fannie Mae and Freddie Mac’s existence is so small or even harmful, they need to go.

*The Federal Reserve estimates (Passmore 2005) that it’s actually only a 7 bps advantage bestowed by Fannie and Freddie. I’m being nice, though, and giving Fannie and Freddie the benefit of the doubt.

^Assumptions: 30-year fixed-rate mortgage. $200,000 is purchase value of home. 5 percent and 4.7 percent are annual interest rates which are then adjusted for 12 monthly periods.

The Two Americas

by Ryan Young on May 25, 2010

in Economy, Personal Liberty

Maybe there is something to John Edwards’ “Two Americas” conceit after all. Except the warring factions aren’t the haves and have-nots. They are what Steven Malanga calls tax eaters and tax payers. And the two see the world very differently. See this revealing excerpt from today’s WSJ Political Diary (subscription required).

Pollster Scott Rasmussen uses several questions to break down voters demographically, but one of his most original tweaks is to differentiate between those voters he calls the “Political Class” and those he calls “Mainstream Americans.” The “Political Class,” representing about 14% of the electorate, tend to express “trust” in political leaders while rejecting suggestions that government is its own special interest and often works with big business against consumers. In contrast, “Mainstream Americans” represent about 75% of the voting public and identify with or lean toward a more populist skepticism about the intentions and actions of political leaders.

Striking is how the two groups divide on the question of repealing ObamaCare. “Mainstream Americans” support repeal by an overwhelming 73%, while the numbers are almost exactly reversed among the “Political Class,” 72% of whom oppose repeal.

Sen. Richard Shelby, Thief

by Ryan Young on February 6, 2010

in Politics as Usual, Zeitgeist

One reason Democrats were so upset about losing their 60th Senate seat was that it would make it easier for Republicans to obstruct legislation.

Fair enough. But the revived possibility of a filibuster may turn out to be the least of their worries.

Sen. Richard Shelby, an Alabama Republican, has placed a hold on more than 70 of President Obama’s nominees.

His motivations are not partisan. He wants money. A lot of it. If Democrats simply throw a few billion federal dollars at his home state, he promises to release his holds.

Basically, Sen. Shelby is requesting a wealth transfer from federal taxpayers – that’s you and me – to politically favored groups in Alabama. Presumably the earmarks would make him look good to Alabama voters. Sen. Shelby is up for re-election this November. Who doesn’t like free goodies? Vote for Shelby!

But they aren’t free. The money to pay for them has to come from somewhere – us. Let us mince no words, then. Sen. Shelby is a thief. What a shame that such stealing is perfectly legal.

John Berlau Debates Credit Card Fees and the Bank Bailout

by Richard Morrison on April 15, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=WBJrkn_kJw8 285 234]

Barack Obama v. Warren Buffett on the Economy

by Richard Morrison on March 18, 2009

in Video, Zeitgeist

[youtube:http://www.youtube.com/watch?v=kc21pz5lpzE 285 234]

Sen. Richard Shelby, LOL*

by Richard Morrison on March 9, 2009 · 1 comment

in Bailout Watch, Economy, Stimulus to Nowhere

We normally don’t spend much time praising elected officials here at OpenMarket, but I have to make an exception (this week, at least) for Sen. Richard Shelby of Alabama. Over the weekend he appeared on TV and trashed the seemingly endless series of financial services bailouts, making the case that if these companies are incapable of functioning without billions of taxpayer dollars, the government should simply let them go into bankruptcy:

“Close them down, get them out of business,” Shelby, the senior Republican on the Senate Banking Committee, said on the ABC television program This Week With George Stephanopoulos. “If they’re dead, they ought to be buried.”

Finally, a sensible response. To paraphrase a Fox News commenter from last week, how is it that Treasury officials and banking gurus keep telling us that companies like to AIG are “too big to fail”? If you can’t continue to exist without a continual cash lifeline from the U.S. Treasury, you’ve ALREADY failed. All that’s left is an empty husk being refilled with more and more deficit spending. For his honesty and disregard of the self-interested Wall Street types who simply want more government money, Sen. Shelby wins this week’s coveted *Least Objectionable Legislator award from OpenMarket.org. Keep up the good work, senator!

Thanks to our own Wayne Crews for creating the LOL Award. May it be more often deserved!

Iain Murray on the Anti-Stimulus

by Richard Morrison on February 12, 2009

in Deregulate to Stimulate, Economy, Stimulus to Nowhere

On behalf of my distinguished colleague Iain Murray, who is busy speaking at a very important press conference this morning, let me present his prepared remarks on the impending stimulus bill:

Remarks of Iain Murray, Director of Projects and Analysis, Competitive Enterprise Institute

Good morning. Others have already told you what an unutterable waste of money this so-called stimulus package is. I just want to make two points. First, that the American people have been misled about the nature of the bill, and been sold a pig in a poke. Second, that if you really want to stimulate economic activity, there is a very simple way to do it that doesn’t cost a penny; we call it “liberate to stimulate.”

The American people were told that this bill would give Americans jobs as a result of great public works projects. It won’t. Congress and the Agencies have between them made it very difficult to undertake great infrastructure projects, and impossible to do it quickly. That’s why almost all the supposed “shovel-ready” projects in the bill are maintenance projects and the like. If you thought Americans would be building roads, only 3 percent of the Senate stimulus package is for roads. Only 7 percent is for new infrastructure in general.

As for so-called “green energy,” the much-vaunted aim of doubling alternative energy can be achieved by business-as-usual, so little energy is provided by wind and solar. My colleague Jonathan Tolman and I also worked out that the House bill contains just about $6.4 billion aimed at creating “green jobs,” and only 70,000 would be created. This bill is not what was advertised.

So how can we stimulate the economy? As I mentioned, Congress has made it very difficult to build infrastructure. It needs to lift those restrictions. Gov. Schwarzenegger and three former California governors have all complained about the restrictions of the National Environmental Policy Act causing misallocations of infrastructure funding. Those restrictions need to be removed, as Gov. Schwarzenegger has asked. Similarly, we need clean electric power, and we need large amounts of it, but it takes ten years or more to break ground on a nuclear power plant. If the regulators sped up the permitting process like they’re doing in the UK, then we could get moving on new nuclear build very quickly. Those sorts of reforms don’t cost anything, and can get America back to work, which is what we all want to see.

Check out more on the topic under the “Deregulate to Stimulate” category.

LibertyWeek 29: The Mother-in-Law of All Debts

by Richard Morrison on February 9, 2009 · 1 comment

in CEI Projects, Podcast

Welcome to Episode 29 of the LibertyWeek podcast, where your hosts Richard Morrison and Cord Blomquist are happy to slave away in front of hot mikes to bring you the best in news and views. After a brief celebration of twenty-five years of Yuri Andropov being dead, we focus on the 900 billion lb. gorilla in the room, the economic stimulus bill making its way through Congress. Alternate references to it as porkulous, the Stimulus to Nowhere and the Mother of All Debts are also acceptable. Having spent our way through future generations, we take a look at the new e-book reader, the Kindle 2, with a little help from our friends at Ars Technica. Moving on to Scandal Watch, we look into both the faux scandal and the actual conflicts of interest in the herstory of Labor Secretary-Designate Rep. Hilda Solis (D-CA). Finally, we give Michael Phelps some additional support and encouragement in a very special installment of Olympic News.

Listen here!

Expensive Energy Does Not Stimulate the Economy

by William Yeatman on February 3, 2009

in Economy, Energy, Stimulus to Nowhere

Last week the House of Representatives passed HR 1, The American Recovery and Reinvestment Act, which allocates $816 billion to stimulate the economy. Environmental policy figures prominently in the House’s stimulus package, including $72 in direct spending for green energy and $20 billion in clean energy tax incentives. According to the liberal Center for American Progress, this $92 billion will create 459,000 green jobs by 2010, at a cost of $196,000 per job. What a deal!

The Senate will soon begin to debate over its own version of the stimulus package, S. 336, The American Investment and Recovery Plan, which would spend $887 billion to get the economy going. The bill includes $78 billion in clean energy spending, and $31 billion in tax incentives for renewables and energy efficiency.

Of course, the only reason that the clean energy industry needs generous taxpayer support is because it cannot otherwise compete with conventional energy sources. Which begs the question: How is it possible to stimulate the economy by forcing Americans pay more for energy?

An example will help clarify my point. President Barack Obama wants the stimulus package to spend $32 billion to provide 6 million homes with green energy by 2012. By comparison, the Navajo Nation in the Four Corners region plans to build enough coal-fired power by 2012 to supply 4 million homes in the rapidly growing southwest. Both plans would power a similar number of households by 2012. The difference between the two plans is that Obama’s renewables need $32 billion in taxpayer money to compete with conventional energy sources, whereas the Navajo Nation’s coal projects can make a profit without lavish government handouts.

For a detailed account of the green pork in both bills, click here. The numbers are appalling. Virtually every energy boondoggle is well positioned at the taxpayer trough, from synfuels to ethanol. It is farm-bill politics at its worst (N.B. “farm bill politics” is a style of legislating by which every possible stakeholder is bought off, so that there are no objections to a spending bill’s passage. As its name suggests, negotiations leading to a renewal of the God-awful farm bill every 5 years are the paragon of this governing technique).

Although both plans stink, they are not the same.  E&E Daily today reported that there are 3 major differences between the energy provisions of the House and Senate stimulus packages:

1. The Senate increases Loan Guarantee Program (authorized in Title 17 of 2005 Epact) by $50 billion in 2009. The program covers “commercial projects,” including nuclear and coal to liquid, which frightens environmentalists. The House keeps 2009 funding for “commercial projects” steady (at $38 billion), and amends Title 17 to include $8 billion in temporary funds for renewables and green transmission.

2. The House and the Senate disagree over tax incentives for renewable energy. HR 1 would fund up to 30% of construction costs for renewable projects that break ground in 2009 and 2010. I have not seen a cost estimate for this provision. S 336 does not have this provision. Senator Bingaman argued that grants are inappropriate because the taxpayer would not receive any compensation for its investment.

3. The Senate bill also provides about $5 billion less in direct energy efficiency investment than the House package. The greatest difference lies in the low-income assistance weatherization program, which would receive $2.9 billion in the Senate bill as compared to $6.2 billion in the House version.

LibertyWeek 27: Blago in Absentio

by Richard Morrison on January 28, 2009

in CEI Projects, Podcast

Your hosts Richard Morrison and Cord Blomquist welcome you back to another episode of LibertyWeek, wherein we start by highlighting CEI’s new Agenda for Congress. After all, they need adult supervision from somewhere, right? We then take on the new rules for bailout spending at Treasury, Gov. Blagojevich’s no-show status at his own impeachment trial, and an interview with Bureaucrash Crasher-in-Chief Pete Eyre. Finally, we round out the program with some appropriately strenuous Olympic News.

Listen here.

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