Stiglitz: Fannie poses no tax payer risk

http://online.wsj.com/public/resources/documents/stiglitzrisk.pdf
The paper concludes that the probability of default by the
GSEs is extremely small. Given this, the expected
monetary costs of exposure to GSE insolvency are
relatively small — even given very large levels of
outstanding GSE debt and even assuming that the
government would bear the cost of all GSE debt in the
case of insolvency. For example, if the probability of the
stress test conditions occurring is less than one in
500,000, and if the GSEs hold sufficient capital to
withstand the stress test, the implication is that the
expected cost to the government of providing an explicit
government guarantee on $1 trillion in GSE debt is less
than $2 million. To be sure, it is difficult to analyze
extremely low-probability events, such as the one
embodied in the stress test. Even if the analysis is off by
an order of magnitude, however, the expected cost to the
government is still very modest.

This paper highlights that Economists are TERRIBLE at predicting the future. Might as well hire the popcorn lady. What they are good at is helping an organization estimate the impact of an event. Stiglitz assumed the risk to Fannie was an interest rate risk one when it was primarily a default one. Something to ponder when you see the NY Times put Paul Krugman on a pedestal.

Nice way to clip a quote to eliminate the caveat that immediately precedes and undermines your conclusion:

on the other hand, to the extent that the risk-based capital standard is not enforced effectively, the approach would underestimate the expected risk to the government.

I think it is pretty clear that this is what happened.

Didn't quite get that after reading:

The paper concludes that the probability of default by the
GSEs is extremely small.

http://www.businessinsider.com/how-joseph-stiglitz-blew-it-on-fannie-and-freddie-2009-12

How could three prominent economists have been so dumb-foundingly wrong about the systemic risk of Fannie Mae and Freddie Mac?

Today’s Wall Street Journal discusses a 2002 paper declaring that "on the basis of historical experience, the risk to the government from a potential default on GSE debt is effectively zero." It’s authors were Jonathan Orzag, Peter Orszag and Joseph Stiglitz, who had won the Nobel prize in economics
the year before. We've embedded it below so you can read the whole thing.

As the WSJ edit page explains:

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.

They noted the government officials had tested Fannie and Freddie's capital against "the financial and economic conditions of the Great Depression" and found the companies could survive.

So what went wrong? Part of the problem seems to be that Stiglitz-Orszag seriously underestimated how large the mortgage portfolios of Fannie and Freddie would grow. More importantly, they didn’t take into account how far down market both institutions would go in pursuit of expanding homeownership to low income and minority households. What’s more, they didn’t take into account the run up in house prices. All of these errors led them to seriously underestimate the level of defaults and the serious problems falling housing prices would pose for recovery values from foreclosures.

In short, they totally failed to predict what would happen.

Is this forgivable? Not really. The confidence of the paper belies the weakness of its stress tests. There were plenty of people warning about the dangerous road Fannie and Freddie were headed down, including the editorial page of the Wall Street Journal. Last year, in fact, a writer from the Journal (my brother Brian Carney) was awarded a Loeb Award for sounding the alarm bell. Stiglitz came around later, but by then it was too late.

Stiglitz may be somewhat of a polyana. Here's an interesting exchange between him and fund manager Hugh Hendry on Greece.

http://paul.kedrosky.com/archives/2010/02/hugh_hendry_vs.html

>> Didn't quite get that after reading:

That's ok -- it's easy to completely miss the point of an article if your intent is to not understand.

Where's your data that the capital standards were effectively implemented?

Arafat wins noble peace prize for blowing up school buses.

Al Gore wins noble peace prize for a hoax.

Obama wins noble peace prize for a a a a a nothing..

And Stiglitz and Krugman wins noble for economics for 2+2=5

Oh yes, Julialg. The Noble has become such BS. Sad, I guess.

Gore is a moron. Just listen to how he can't even admit the weakness of his position using words like "flawed overestimate", "partly inaccurate" "may not have adequately followed the requirements"

It is true that the climate panel published a flawed overestimate of the melting rate of debris-covered glaciers in the Himalayas, and used information about the Netherlands provided to it by the government, which was later found to be partly inaccurate. In addition, e-mail messages stolen from the University of East Anglia in Britain showed that scientists besieged by an onslaught of hostile, make-work demands from climate skeptics may not have adequately followed the requirements of the British freedom of information law.

And then says, "What is important is that the overwhelming consensus on global warming remains unchanged"

"And then says, "What is important is that the overwhelming consensus on global warming remains unchanged"

Between the emails disclosing the the global warming research was BS & the evidence of this past winter (let alone this past week), I cannot fathom the cajones of these people. So, why do they do it? IMO, it's because global warming is the new green biz; there's lots of $ to be made & they are the ones who will profit. Of course, they think they can get away with it because they keep repeating the lie & the sheeple, drunk on Soma, don't notice.
I support energy conservation, but not the way the greenie bizers want to do it.

I'm surprised Al Gore hasn't suggested a device strapped to the asses of Sheep, Pigs and Bovine to trap carbon dioxide emissions.

What are you people even talking about?

i agree dwell

I think I know what sheeple are, but the drink "soma" eludes me. Is that something sheeple drink?

http://en.wikipedia.org/wiki/Soma

"In Aldous Huxley's dystopian novel Brave New World, soma is a popular dream-inducing drug. It provides an easy escape from the hassles of daily life and is employed by the government as a method of control through pleasure."

Earth to Mars: This will be the warmest winter on record. Again.

But no, you anonymous posters on a nyc real estate board are clearly more clever than the physicists at MIT, NASA and all those other elitist institutions. Al Gore and Dr. Evil have brainwashed the entire scientific community into perpetrating a collosal hoax to line their own pockets.

Now if we can just get to the bottom of this smoking causes cancer bs...

Malthus: And what's really crazy is these are the same posters that are on other threads bemoaning the decline in US competitiveness due to a lack of math and science. They never seem to be able to quite make the connection that the decline in math and science is due to their tribe's embrace of a wholly anti-intellecual, anti-science, anti-expert worldview that can't even comprehend what it takes to make real progress in science.

You want US competitiveness? Well, stop bemoaning and denigrating science and scholarship that makes it possible. When you talk about eggheads and academic elites, what kind of an example do you think that sets for young people thinking of becoming a scientist? You have to make the academy appealing for kids to aspire to be a part of it. It takes elites in a field to make progress, and your anti-elite rhetoric -- especially when applied to academics -- deters kids from wanting to be a part of that elite.

If you would like to spawn another generation of anti-science fry cooks, please feel free to continue to baselessly attack the academy that produces scientists and engineers.

Your rhetoric is partially responsible for the very condition you're complaining about.

Under the circumstances bringing in foreign workers to fill high tech positions in u.s. companies boosts our competitiveness. It's no accident that our country has maintained its competitive position in the world better than the Europeans.

That said, I believe we can do better, and we need to focus this country on doing better in math and science.

any suggestions as to how this can be accomplished?

I'm with skinny. I think if enough women throw themselves at young aspiring geeks ala tiger woods, we would not be trailing the rest of world in math and science.

We need more skanky girlz. Or could it be that in america we 'ldolize' athletes, movie stars and any quick rich scam artist more than hard work. Any obamie's support of this lemming market is front and center of the continuation of work less consume more americanism!

But it wouldn't hurt if skanky girls threw themselves at intellectual men that don't make much money, it's their patriotic duty!