Mary Ruwart: Fannie/Freddie bail-out ‘redistributes wealth from poor to rich’

Dr. Mary Ruwart has issued a statement concerning the government’s proposed bailout of ailing NYSE-traded firms, Fannie Mae and Freddie Mac. The Libertarian Party, Bob Barr, and the Boston Tea Party’s Charles Jay have previously released statements on the matter.

Dr. Ruwart’s statement, while in many ways echoing the sentiments of the LP and Mr. Jay, is in stark contrast to Bob Barr’s proposal to give the Federal Reserve “greater oversight” powers over Fannie and Freddie. Dr. Ruwart says: “The Federal Reserve is the institution that lends the U.S. government money. We pay the interest on that debt. This bailout, indeed any program that requires the government to borrow, generates windfall profits for the members of the Fed, a private banking institution. Isn’t that rather like putting the fox in charge of the hen house?”

Below is Dr. Ruwart’s statement in full:

When President Bush promised to prop up the failing Fannie Mae and Freddie Mac, he authorized a transfer of wealth from those who live from paycheck to paycheck to those who have enough money to play the stock market. These lending institutions are owned by stockholders, who saw their shares plummet to lows of 6.7 and 5.0 respectively before they were promised taxpayer bailout. After Bush’s announcement, the stocks recovered to 13.4 and 9.2 respectively, making over 100% profit for speculators and saving investors from further stock free-fall.

Instead of investors losing most of what they paid for their stock, you and I will pick up the tab. The promised bailout has to come from our pockets, because we are the government’s only source of income. Government must tax us or create inflation by borrowing (the most likely scenario). The buying power of our savings and paychecks will plummet. People on fixed incomes (e.g., seniors) will be hurt the most.

How much will the bailout cost us? It depends upon how many mortgage holders default. If everyone did, which is unlikely, we could be looking at $5 trillion. When you consider that the national debt is $9.6 trillion, you can see that this bailout could, in the worst case scenario, cost us about a third of our buying power.

That may only be the beginning, however. Reassured that they won’t be punished for risky investments, management will make the sub-standard loans that got them into trouble in the first place. In several years, we’ll get to do this again! Where will it stop? It won’t! Other lending institutions will want the same subsidies—at our expense.

Some individuals are calling for more oversight of the two lending institutions by Congress or the Federal Reserve. The Federal Reserve is the institution that lends the U.S. government money. We pay the interest on that debt. This bailout, indeed any program that requires the government to borrow, generates windfall profits for the members of the Fed, a private banking institution. Isn’t that rather like putting the fox in charge of the hen house?

Let’s summarize here: speculators, investors and bankers profit. We pay the bill, most likely through inflation. The rich benefit at the expense of the not-so-rich. The poor, who won’t be able to cope with the higher prices which result, will become poorer.

We should not be surprised at this result. Big government always favors the rich. Like a wolf in sheep’s clothing, Big Brother offers us a free lunch, while neglecting to tell us that we are the main course.

24 thoughts on “Mary Ruwart: Fannie/Freddie bail-out ‘redistributes wealth from poor to rich’

  1. Carl M

    Mostly good stuff. But the last paragraph is a gross overstatement which helps undermine the rest. Big government does not always favor the rich. It sometimes favors the rich. One might even make a case for usually favors the rich, but that’s a mighty big assertion to make without a book’s worth of backing.

    Would be interesting to know who the main stockholders are of Freddie and Fannie. Is it really the rich, or is it held by retirement funds or what?

    I wonder if Mary did the research, or just made the assumption?

    G.E., you’re the big capitalist expert. Is this information available? What is the answer?

  2. G.E. Post author

    You can look up the supposed holders of the stock at finance.yahoo.com — but there has been massive, massive turnover of the shares (obviously) as they’ve lost 80-90% of their value. Stocks don’t go down by people holding them.

  3. G.E. Post author

    Fannie Mae exec Daniel Mudd (appropriate sur name) holds about 700,00 shares. I’m sure the fall from $70 to $7 hurt him in the wallet — about $44 million in losses. And when the Fed provoked the one-day jump Dr. Ruwart’s talking about, Mr. Mudd’s net worth jumped $4.7 million. Chump change in the grand scheme of things, but pretty generous of Mr. Bernanke, nonetheless.

  4. G.E. Post author

    Mary Ruwart’s statement is phenomenal, of course — a real libertarian answer, much like Charles Jay’s.

    One minor critique, though: The Federal Reserve does not generate windfall profits. The Fed has its expenses, its lavish salaries, etc., to pay. It also pays a 6% yield on the capital invested by its owner-banks. But all of its profits, in excess of these expenses, are dumped back into the Treasury.

  5. G.E. Post author

    It occurred to me that Dr. Ruwart could be/is probably referring to the profits of individual Fed banks (i.e. almost every bank in the country). That’s one thing that makes analysis of “the Fed” difficult — “the Fed” has a few definitions.

  6. Carl M

    OK, looking at yahoo, Freddie Mac is owned 106% by institutions. I assume that’s roundup error. In other words, letting freddie crash hits a bunch of mutual funds and banks (and hedge funds??). Are this institutional funds held for the rich, or for retirees?

    Fannie Mae is 94% institutions.

    (By comparison, IBM is 62% owned by institutions.)

  7. G.E. Post author

    How up-to-date are those numbers? They’re not updated in real time. The price of the stock did not go down in a vacuum: The shares were sold.

    Secondly, the fact that shares are supposedly held by institutions means nothing. If they were zero percent held by institutions, vs. 106%, I could not tell anything more about the poor/rich divide of shareholders. One thing I can guarantee is that virtually 0% of beneficiaries are “poor.”

    Finally: Even if all “106%” of shares are held by, let’s say pension funds, two things:

    1) The rich still benefit… The entire class of management and underlings who manage the funds take huge chunks, and these people are R.I.C.H.

    2) Although it would contradict Mary’s point, a bail-out for the poor is no better than a bail-out for the rich. I don’t care if pregnant single mothers stand to lose everything, I say NO to a taxpayer bail-out.

  8. Jeff Wartman

    Mary Ruwart’s statement is phenomenal, of course — a real libertarian answer, much like Charles Jay’s.

    Something tells me that Ms. Ruwart’s statement was ghostwritten by a writer with the initials J.S.

    😉

  9. G.E. Post author

    Nope.

    Although I wonder if she borrowed from my post here at LFV.

    Come on, Jeff, you should know I didn’t ghostwrite it… I wouldn’t have said what she said about the Fed’s “windfall profits” — or was that a clever ruse to throw you off the trail?

    Seriously, I did not write it. The only contact I’ve had with Mary Ruwart since Denver is confirming that she in fact endorsed Scotty Boman.

  10. G.E. Post author

    Oh, and besides: Mary Ruwart hiring a ghostwriter would be like calling in a pinch hitter for Barry Bonds.

  11. mscrib

    This is largely the area where I part ways with some libertarians (I guess this is why I’m one of those “cosmotarians”). The GSEs are so essential to functioning capital markets (right now) that letting them fail would be far more detrimental to anybody with a financial asset or with a desire to obtain one (which means the fallout will “trickle down” to even POOR people — DUH, Mary!) than the increase in inflation that might occur from a targeted intervention. I think long-run we should look to ditch Fannie and Freddie, but this needs to happen in an orderly fashion, not in overnight institutional failure.

  12. G.E. Post author

    The GSEs are absolutely not essential to anything other than the government’s social engineering programs.

    How the hell would letting them fail affect ANYONE with a mortgage? It wouldn’t.

    As for people trying to get a mortgage: What you’re saying is that the government’s artificially low mortgage rates, which have devastated the economy by immobilizing workers, would come to an end.

    GOOD!

  13. karl

    Mary Ruwart needs to go crawl back in the hole she came out of, and leave this stuff to the people who are running for office—which she is not—thankfully. Time to clean up your dirty laundry at home, Mary.

  14. mscrib

    G.E.,

    Well, that’s not the whole picture. The secondary mortgage market is a HUGE pool capital that would collapse if Fannie and Freddie fail — I’m talking $6 TRILLION here. This is what makes this situation so sticky and why the GSEs are “too big to fail.”

  15. G.E. Post author

    Explain to me how this “collapse” would come about?

    It would not.

  16. mscrib

    As the mortgage-backed securities packaged into CDOs on the secondary mortgage market become worthless, the liquidity pool that Freddie and Fannie are supposed to provide to the mortgage market evaporates. Basically, there is no more money for mortgage lenders to rely upon to issue mortgages and there is no more “product” for the financial institutions to package and repackage — killing overall market liquidity. Not a pretty picture.

    You have to understand that virtually every bank and lender in this country relies heavily upon this system. Pulling it out from under their feet would be a very bad idea and would affect all of us (unless you’re living off the grid) in a very, very, very, very, very bad way.

    Look, it’s easy to say as a principled libertarian, “enough of the government involvement; just end it now.” It’s an entirely different matter when the feds have a 70-year-old entrenched system making up half of more than $10 trillion secondary mortgage market that every bank employee/customer since the ’30s has come to expect and rely upon. That’s why any “doing-away” with the GSEs must happen in a careful and orderly manner so not to disrupt the economy at large. I don’t like it, but there’s really no other sensible way that I know of.

  17. G.E. Post author

    The mortgage instruments only become worthless if people do not continue paying their mortgages. Even still, they are backed by the underlying properties, and thus, are not “worthless.”

    People knew what they were signing on for when they took out the loans, the banks knew the deal when they issued them, and investors knew what they were getting into when they purchased the securities. If they didn’t, TOO BAD.

    Banks are fundamentally bankrupt by their very natures. Ripping the mask off the imposter and letting the whole Scooby gang see whodunit is inevitable, and we might as well do it now.

    Market liquidity killed? GOOD.

    Banks bankrupt? GOOD.

    The banks are already bankrupt, the market is “lubricated” by the fraudulent inflationary system, and guess what, the economy is already disrupted!

    Your central planning scheme will not make things better; it will only make them worse.

  18. mscrib

    Well, if “better” is defined as “drastic decrease in national standard of living” and “worse” is defined as “staving off the largest financial crisis since the Great Depression,” you’d be right. The banks provide the most crucial services in the economy — they create money AND lend it out to people they don’t know. Despite what you hear in the media and on the Internet, credit, the easier the better, is a very good thing.

    Banks have done more good for this country than Ron Paul and the antibankites ever will. What, did you think our country was built on cash-in-hand payments? May I remind you that loans financed the revolution (the real one, not the r3VOLoveUTION or whatever they’re calling it now).

  19. G.E. Post author

    Absolutely absurd neocon propaganda above.

    The Fed does not create our standard of living and removing the fascist financial system that causes inflation and depressions would not … cause another Great Depression.

    Real “credit” created by real savings is a blessing. Credit manufactured by the government is not.

    I don’t get my information from the Internet — I’m a financial professional and I deal with this stuff every day.

    You need to educate yourself and stop spewing B.S.

  20. mscrib

    But this isn’t radical “B.S.” It’s the consensus amongst the economics profession (I suppose they’re my cronies).

    As a financial professional, you must know that the most regulated sector of the American economy is the financial sector. As such, the government shouldn’t be able to say “do this for 50 years” and then reverse course overnight. I am for deregulation of the financial sector (long-term, virtually complete deregulation), but not in a way that will destroy much of the banking industry and the livelihoods of the Americans who depend upon it.

    That is not neocon crap. And let me note that Dr. Mary Ruwart has next to no formal training in economics or academic-level finance. I would take her opinions a little more seriously if the Ph.D her “Dr.” refers to were in economics or finance (or even business, fer christsakes!).

    I think I support the same ends as you, G.E., but in a way that will leave the fewest bodies on the ground. If we could implement a system similar to what Milton Friedman advocated, I would support it, but certainly not replacing it with the gold standard or gold reserve system (those went out of fashion before bell bottoms, Paulites, and for good reason).

  21. G.E. Post author

    It’s the consensus amongst the economics profession (I suppose they’re my cronies).

    Not true. And yes, most professional economists work for the state or institutions that rely heavily on the state, and thus they are “cronies.”

    Your slander against the gold standard is typical of neocon propaganda. Under the gold standard, governments can’t fund unpopular wars.

    I disagree with your assertion that the “body count” would consist of people who didn’t deserve to “die.” Poor people who have nothing have nothing to lose. The middle class has nothing to lose but its chains — the inflationary yoke placed upon them by the financial system and the welfare state. Debtors would see their burdens inflate away. Those who are heavily invested in dollar-denominated assets are morons and deserve to go broke just like the idiots who invested 100% of their 401ks in Enron deserved to lose.

  22. mscrib

    Your slander against the gold standard is typical of neocon propaganda. Under the gold standard, governments can’t fund unpopular wars.

    But what about the popular wars? Remember that most of this country supported the Iraq invasion and continues to support the Afghanistan occupation.

    Could I suggest a “third-way” (all fascist and neocon jokes aside) where 1) the government offers a fiat currency not pegged to commodities prices, 2) the government allows competition in currency, allowing for all privately-backed currency, 3) stops waging wars.

    Dr. Paul is wrong to believe that the U.S. couldn’t have invaded Iraq if we had the gold standard: hasn’t he ever heard of war bonds? I mean, if we could invade an entire continent with them (TWICE!), I’m sure Iraq wouldn’t have been much of an issue. But I’ll give him the benefit of the doubt. He’s old and likely forgot this MAJOR FACT of American history.

    Poor people who have nothing have nothing to lose.

    What is “poor” in this country? Do you mean the people on the streets or the people in public housing with cable TV, cellphones, and cars who don’t go hungry every night? Those fancy gizmos are all things brought about by the economy as a whole. When you start pulling the plug on capital markets, everything else will follow. You won’t have business investment, which means you won’t have jobs, which means you won’t have consumers, et cetera. It’s kind of like a big Jenga game.

  23. mscrib

    Dammit. If you can add the end bold tag after “unpopular wars.,” it would be much appreciated. Sorry.

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