Posted on 12/01/2009 7:48:03 AM PST by FromLori
As Congress lumbers toward creating a systemic-risk regulator, it's worth a look back—to 2002, when an economist named Stiglitz and a duo named Orszag wrote a paper with the droll title, "Implications of the New Fannie Mae and Freddie Mac Risk-Based Capital Standard."
We won't keep you in suspense. The paper, written the year after Joseph Stiglitz won the Nobel Prize for economics, concludes that "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." Their analysis has recently been making the rounds on the Web to a chorus of chortles.
But the real lesson of the paper is not that Mr. Stiglitz, or Peter Orszag, the current White House budget director, and his brother Jonathan are dupes or rubes. The paper is notable because it represents the almost universally held view of the two government-sponsored mortgage giants at the time and for years afterward.
These pages began writing about the systemic risk posed by Fannie and Freddie at around the same time, but until the very end we were in the distinct minority. Fan and Fred's own regulator assured the world that they were well-capitalized almost until they were put into conservatorship in September 2008.
The Stiglitz-Orszag paper's method was to put the companies through "millions of potential future scenarios," and then to judge the likelihood of default. The assumptions in the test were said to be "severe." Even so, the probability of a default was found to be "so small that it is difficult to detect." Some $111 billion in taxpayer-funded bailouts later, with perhaps hundreds of billions to go, the risks have been detected.
(Excerpt) Read more at online.wsj.com ...
ping and related
http://www.businessinsider.com/how-joseph-stiglitz-blew-it-on-fannie-and-freddie-2009-12
I point this out because this failure is the result of the arrogance of the brilliant who were totally without common sense. J. Kenneth Galbraith described the whole thing so well in his book "The Great Crash of 1929." A highly regarded liberal economist from Harvard was totally disregarded at the Ivy League until it all came crashing down again.
The story of our current debacle is not the question about how it all came apart. It always does. The interesting question this time is how the economic powers that be kept the whole circus going for so long.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.