Should we pay members of Congress for performance? Can we?

This could be interesting.......I mean if they want to pay teachers on their performance, then why not congress.  They make way too much for the little time they spend at work.  And if they were graded by their constituents, members of their respective houses, by their work, how much time they spend working, statesmanship, long term impact.   I mean start them out at  $75,000 then according to how they are rated they possibly could make 1 - 4 times their base pay in bonuses (75,000)worst (300,000)best. 
I do not think it is a bad idea, I do not know who would exactly go for it, except maybe we the people.   I mean there are times that special interest donate to their favorite congressman, and why should we pay them this ponderous salary, if they do not earn it.  We pay CEO/executives for their performance, why not use the same sort of pay for our Congressmen. 


Posted at 1:01 PM ET, 02/11/2011

By Ezra Klein

Can we pay members of Congress for being productive?

That's what Rep. Jim Cooper (D-Tenn.) wants to do. "The real trouble with Congress is that you get what you pay for, and we are paying for the wrong things," he said in a recent speech at Harvard's Edmond J. Safra Center for Ethics. "Right now taxpayers are paying for mediocre members of Congress to look good while ducking fundamental issues in order to get reelected. Fixed salaries do much more to perpetuate the terrible status quo than most people realize."

The problem is, how do you measure congressional productivity? Bills passed? Constituents helped? Television hits? Even Cooper doesn't know.

Initially, I wrote his idea off as economic thinking run amok. But an interview today changed my mind, at least a bit. Cooper may not know how to pay congressmen to be more productive -- and he's not for higher pay overall. But he makes a good case that they are currently paid -- or at least rewarded -- for the wrong sorts of productivity.

"If you look at it carefully," he says, "we're already being paid for performance. But it's by special interests. And even here on the Hill, we kind of pay ourselves for a certain type of performance. Party leadership hands out all these perks: Committee assignments, staff privileges, annex offices, pages, even permission to travel. And then there are campaign contributions from the DCCC."

So what to do about it? That's a bit harder. There are crude measures of productivity like attendance at votes, hearings, and issue meetings. But it's not clear where exactly that gets you. It's important for a member of Congress to show up for a vote, but is it really better performance for her to help name a post office in another state than to meet with a constituent or read an issue brief? Another option is to reduce the bad types of performance pay, or at least their appeal, through things like campaign finance reform. But perhaps you folks have some subtler, better ideas for how to do this. Can we pay members of Congress for performance?

Ike was right: Defense spending must be cut

By David Ignatius
Wednesday, January 26, 2011; 

Last week we celebrated the anniversary of President John F. Kennedy's 1961 inaugural address, with its ringing call to "pay any price, bear any burden" for the nation's security. But a better guide to the choices we face today is President Dwight Eisenhower's farewell address,( you can listen and follow speech below) delivered three days earlier, and his call to restrain the "military-industrial complex."
Trimming the defense budget is one of the hardest tasks in Washington. Congress never met a weapons system it didn't like. But with the nation's debt problems, making sensible cuts has become essential. That's clear to Defense Secretary Bob Gates and the military leadership, as President Obama noted in his State of the Union address, even if Congress is still treating the Pentagon budget as a pork barrel.
Senior Pentagon officials recognize that new technologies make it possible to reshape the budget without putting the country at greater risk. But this transition will require an honest evaluation of the "legacy systems" - the squadrons of manned bombers and fighters; the fleets of aircraft carriers, cruisers and submarines - that are wrapped in red, white and blue.
The military loves these traditional instruments of American power, despite their immense cost. But as technologies change, they will gradually become as outmoded as a cannonball or a cavalry charge.
Defense analysts argue that the military needs to focus less on fancy platforms - its nuclear ships or supersonic jets. These systems will soon be vulnerable to attack from lasers and other directed-energy weapons. But more important, the platforms will matter less than what they carry. This is the age of "unmanned aerial vehicles" - and soon unmanned ships, subs and tanks, too. These simple, autonomous platforms will be cheaper and more robust but no less deadly to an adversary.
If the Obama administration seizes this opportunity and drives it through the inevitable congressional opposition, it can begin a real transformation of the defense budget. Technology should allow the United States to cut costs for traditional legacy systems as it prepares for the new threats that are ahead.
The new technologies that will drive these changes are detailed in a study called "Technology Horizons" that was prepared last year by Werner Dahm, who was then chief scientist of the Air Force. He urged research on "cyber resilience" and "electromagnetic spectrum warfare," including lasers and other beam weapons. And he stressed that unmanned systems, coordinated by advanced software, can give "operational advantages over adversaries who are limited to human planning and decision speeds."
Lasers are only a few years away from being practical weapons, Pentagon officials say. Ground-based lasers could revolutionize air defense, and a new generation of solid-state lasers may be small enough for airborne platforms. "Directed-energy systems will be among the key 'game-changing' technology-enabled capabilities," wrote Dahm.
Space will become, metaphorically, a vulnerable "low ground" in this new environment. Powerful ground-based lasers will be able to blind or disable satellites, so redundant forms of communication will be needed. So will alternatives to platforms that depend on space-based Global Positioning System (GPS) technology.
Though our "Buck Rogers" fantasies make us think of lasers primarily as offensive weapons, experts say they will be just as useful for surveillance - illuminating targets with pinpoint digital precision (when clouds aren't in the way). Researchers are developing laser-driven air-defense systems that can instantly detect and then strike incoming missiles. This is a technology revolution that, among other things, could actually make Israel safe from missile and rocket attack.
The hard part of this defense transformation will be giving up the grand old systems that for generations have symbolized U.S. military power. But that process of shedding the past is absolutely essential. If we try to keep all the old systems and add the new ones, our already overstretched budget will rip apart like a gunnysack. The Pentagon knows it can't have it all; hopefully, members of Congress (who love to bloviate about cutting the budget but hate cutting actual programs) will get the message, too.
President Obama has the right team in place to begin this strategic downsizing of the defense budget. Gates has been an outspoken advocate of cutting programs we can't afford, and he has strong backing from Adm. Mike Mullen and Gen. James Cartwright, the chairman and vice chairman of the Joint Chiefs of Staff. The military brass knows the country won't be secure if it's broke.
In this season of budget politics, there can't be any sacred cows. Obama and his Pentagon advisers need to show the country that by changing how we spend money, it will be possible to cut our defense budget and stay safe.

Farewell Radio and Television Address to the American People, 

January 17th, 1961 




[Delivered from the President’s Office at 8:30 p.m.]  
My fellow Americans:  
Three days from now, after half a century in the service of our country, I shall lay down the 
responsibilities of office as, in traditional and solemn ceremony, the authority of the Presidency 
is vested in my successor.  
This evening I come to you with a message of leave-taking and farewell, and to share a few final 
thoughts with you, my countrymen.  
Like every other citizen, I wish the new President, and all who will labor with him, Godspeed. I 
pray that the coming years will be blessed with peace and prosperity for all.  
Our people expect their President and the Congress to find essential agreement on issues of great moment, the wise resolution of which will better shape the future of the Nation.  
My own relations with the Congress, which began on a remote and tenuous basis when, long 
ago, a member of the Senate appointed me to West Point, have since ranged to the intimate 
during the war and immediate post-war period, and, finally, to the mutually interdependent 
during these past eight years.  
In this final relationship, the Congress and the Administration have, on most vital issues, 
cooperated well, to serve the national good rather than mere partisanship, and so have assured 
that the business of the Nation should go forward. So, my official relationship with the Congress 
ends in a feeling, on my part, of gratitude that we have been able to do so much together.  
  
We now stand ten years past the midpoint of a century that has witnessed four major wars among great nations. Three of these involved our own country. Despite these holocausts America is today the strongest, the most influential and most productive nation in the world. Understandably proud of this pre-eminence, we yet realize that America’s leadership and prestige depend, not merely upon our unmatched material progress, riches and military strength, but on how we use our power in the interests of world peace and human betterment.  

Throughout America’s adventure in free government, our basic purposes have been to keep the 
peace; to foster progress in human achievement, and to enhance liberty, dignity and integrity 
among people and among nations. To strive for less would be unworthy of a free and religious 
people. Any failure traceable to arrogance, or our lack of comprehension or readiness to sacrifice would inflict upon us grievous hurt both at home and abroad.  Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology -- global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily the danger it poses promises to be of indefinite duration. To meet it successfully, there is called for, not so much the emotional and transitory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle -- with liberty the stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.  
Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, 
there is a recurring temptation to feel that some spectacular and costly action could become the 
miraculous solution to all current difficulties. A huge increase in newer elements of our defense; 
development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in 
basic and applied research--these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.  
But each proposal must be weighed in the light of a broader consideration: the need to maintain 
balance in and among national programs-balance between the private and the public economy, 
balance between cost and hoped for advantage--balance between the clearly necessary and the 
comfortably desirable; balance between our essential requirements as a nation and the duties 
imposed by the nation upon the individual; balance between actions of the moment and the 
national welfare of the future. Good judgment seeks balance and progress; lack of it eventually 
finds imbalance and frustration.  
The record of many decades stands as proof that our people and their government have, in the 
main, understood these truths and have responded to them well, in the face of stress and threat. 
But threats, new in kind or degree, constantly arise. I mention two only.  

A vital element in keeping the peace is our military establishment. Our arms must be mighty, 
ready for instant action, so that no potential aggressor may be tempted to risk his own 
destruction.  
Our military organization today bears little relation to that known by any of my predecessors in 
peacetime, or indeed by the fighting men of World War II or Korea.  
Until the latest of our world conflicts, the United States had no armaments industry. American 
makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men 
and women are directly engaged in the defense establishment. We annually spend on military 
security more than the net income of all United States corporations.  
This conjunction of an immense military establishment and a large arms industry is new in the 
American experience. The total influence-economic, political, even spiritual--is felt in every city, 
every State house, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.  In the councils of government, we must guard against the acquisition of unwarranted influence, 
whether sought or unsought, by the military-industrial complex. The potential for the disastrous 
rise of misplaced power exists and will persist.  
We must never let the weight of this combination endanger our liberties or democratic processes. 
We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the 
proper meshing of the huge industrial and military machinery of defense with our peaceful 
methods and goals, so that security and liberty may prosper together.  
Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has 
been the technological revolution during recent decades.  
In this revolution, research has become central; it also becomes more formalized, complex, and 
costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal 
government.  
Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of 
scientists in laboratories and testing fields. In the same fashion, the free university, historically 
the fountainhead of free ideas and scientific discovery, has experienced a revolution in the 
conduct of research. Partly because of the huge costs involved, a government contract becomes 
virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds 
of new electronic computers.  
The prospect of domination of the nation’s scholars by Federal employment, project allocations, 
and the power of money is ever present--and is gravely to be regarded.  
Yet, in holding scientific research and discovery in respect, as we should, we must also be alert 
to the equal and opposite danger that public policy could itself become the captive of a scientifictechnological elite.  
It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new 
and old, within the principles of our democratic system--ever aiming toward the supreme goals 
of our free society.  

Another factor in maintaining balance involves the element of time. As we peer into society’s 
future, we--you and I, and our government-must avoid the impulse to live only for today, 
plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot 
mortgage the material assets of our grandchildren without risking the loss also of their political 
and spiritual heritage. We want democracy to survive for all generations to come, not to become 
the insolvent phantom of tomorrow.  


Down the long lane of the history yet to be written America knows that this world of ours, ever 
growing smaller, must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect.  Such a confederation must be one of equals. The weakest must come to the conference table with the same confidence as do we, protected as we are by our moral, economic, and military strength. 
That table, though scarred by many past frustrations, cannot be abandoned for the certain agony 
of the battlefield.  
Disarmament, with mutual honor and confidence, is a continuing imperative. Together we must 
learn how to compose differences, not with arms, but with intellect and decent purpose. Because this need is so sharp and apparent I confess that I lay down my official responsibilities in this field with a definite sense of disappointment. As one who has witnessed the horror and the lingering sadness of war -- as one who knows that another war could utterly destroy this 
civilization which has been so slowly and painfully built over thousands of years--I wish I could 
say tonight that a lasting peace is in sight.  
Happily, I can say that war has been avoided. Steady progress toward our ultimate goal has been made. But, so much remains to be done. As a private citizen, I shall never cease to do what little I can to help the world advance along that road.  

So--in this my last good night to you as your President--I thank you for the many opportunities 
you have given me for public service in war and peace. I trust that in that service you find some 
things worthy; as for the rest of it, I know you will find ways to improve performance in the 
future.  
You and I--my fellow citizens--need to be strong in our faith that all nations, under God, will 
reach the goal of peace with justice. May we be ever unswerving in devotion to principle, 
confident but humble with power, diligent in pursuit of the Nation’s great goals.  
To all the peoples of the world, I once more give expression to America’s prayerful and 
continuing aspiration:  
We pray that peoples of all faiths, all races, all nations, may have their great human needs 
satisfied; that those now denied opportunity shall come to enjoy it to the full; that all who yearn 
for freedom may experience its spiritual blessings; that those who have freedom will understand, 
also, its heavy responsibilities; that all who are insensitive to the needs of others will learn 
charity; that the scourges of poverty, disease and ignorance will be made to disappear from the 
earth, and that, in the goodness of time, all peoples will come to live together in a peace 
guaranteed by the binding force of mutual respect and love. 

In the Middle East, a Catch-22 for the CIA

Day 16: Egypt protesters fear revenge if Mubarak holds 

The trappings of a determined protest movement - chanting, flags and raised fists - fill Tahrir Square, the hard-won enclave of those who seek a new Egypt. But some there fear an enemy in their midst.

» LAUNCH PHOTO GALLERY

By David Ignatius
Thursday, February 10, 2011; 

The CIA uses the term "liaison" to describe its contacts with foreign intelligence services. And in Arab capitals such as Tunis, Cairo and Amman, these relationships can be so seductively beneficial that they limit the CIA's ability to run its own "unilateral" operations to learn what's going on inside the host country.
This conundrum - how to work with your hosts and also spy on them - is one of the difficulties facing the CIA as it tries to understand the youth revolution spreading across the Middle East. The agency has cultivated its relationships with people such as Gen. Omar Suleiman, Egypt's chief of intelligence and now vice president, but it has not done as well understanding the world of the protesters.
It's a Catch-22 of the intelligence business, especially over the past decade, when counterterrorism became the CIA's core mission: The agency needed good relationships with Arab intelligence services to collect information about al-Qaeda, but to maintain those relationships, the agency sometimes avoided local snooping. The CIA did recruit some long-term contacts within the Egyptian establishment who are said to have provided crucial intelligence in recent days. But it's a far cry from the early 1980s, when the Cairo station chief would regularly meet the leader of the Muslim Brotherhood and other opposition groups.
"We pulled back more and more, and relied on liaison to let us know what was going on," says one former station chief who's a veteran of the CIA's Near East Division.
These have been trying days for that fabled division, which runs clandestine operations from Morocco to Bangladesh. One agency veteran remembers how "NE" officers would boast to trainees at "the farm": "We are the elite of the operations directorate! We have the most important targets."
But this elite status gradually morphed: Not only were the division's targets important, but so were its liaison partners. Careers were made on a station chief's rapport with the head of Jordan's General Intelligence Department or Egypt's General Intelligence Service. An ambitious officer couldn't afford to have strained relations with his local host.
The problem of dependency became acute after Sept. 11, 2001, when the agency spent many hundreds of millions of dollars bolstering friendly services - especially from authoritarian, pro-American regimes such as Tunisia, Egypt, Jordan, Yemen and Pakistan. Those are the countries now shaken by protest.
Egypt posed a special problem. The military-backed regime was paranoid about foreign spies who might be meeting with domestic opposition figures. The Egyptians maintained such aggressive surveillance that every CIA officer sent there took a special six-week class, known as the "Hostile Environment Tradecraft Course," to learn how to operate in "denied areas."
It was a paradox worthy of the sphinx: Even though the United States was spending billions of dollars to assist Egypt and its military, the CIA had to treat Cairo the same way it did Beijing or Moscow. Thanks to extensive military-to-military contacts and other links, supplemented by clandestine polling, the agency did keep tabs on Egypt - but as the current crisis developed, the United States seemed behind the information curve.
Modern communications technology has aided spying, but it put station chiefs on an electronic leash, limiting the unconventional contacts that might warn what was ahead. Headquarters was now able to micromanage operations: One chief of the Near East Division sent so many nit-picking messages that he became known as "The Mailman."
The CIA's defenders say the agency can juggle liaison and unilateral operations, or as one senior official puts it, "walk and chew gum at the same time." This official notes that since January 2010, more than 400 of the agency's 1,700 intelligence reports on the Middle East and North Africa have focused on issues related to stability.
The revolution in Tunisia was a surprise, says this CIA defender, because it "wasn't clear even to President Ben Ali that his security forces would quickly choose not to support him." As for Egypt, he says, "analysts anticipated and highlighted the concern that unrest in Tunisia might spread well before demonstrations erupted in Cairo. They later warned that unrest in Egypt would likely gain momentum and could threaten the regime."
Here's the bottom line: The CIA is caught in a jam that's emblematic of America's larger problem in the Middle East. The agency has been so focused on stopping al-Qaeda that it has been distracted from other questions. America depends on good intelligence as never before, and the simple truth is that the CIA has to lift its game.

Ruling Egypt After Mubarak: Presidential Contenders Emerge

By ABIGAIL HAUSLOHNER / CAIRO – Sat Feb 12, 1:05 am ET

Even before President Hosni Mubarak left office on Friday, a number of hats were already in the ring to succeed him. Egypt's political future remains in flux, and it's unclear how soon the emerging contenders will get to make their bids for the now vacant presidency. So far, the Supreme Council of the Armed Forces - to which Mubarak had ceded his authority - has simply decreed that the current government ministers would continue running things until new elections are held.

It's quite possible, of course, that Mubarak appointees such as Vice President Omar Suleiman and Prime Minister Ahmed Shafik could seek the presidency. The ruling National Democratic Party is not yet dead, despite what many protesters insist. But amid the euphoria that has continued on the day after Mubarak's fall, many insist that a new era for Egyptian politics has begun, and that the fortunes of Suleiman and Shafik are waning. It may take six months to a year to organize a presidential election, analysts and party leaders say, but many predict that Mubarak's replacement will be the first Egyptian President chosen in a genuinely competitive election. (See photos of Cairo's celebration after Mubarak stepped down.)

"No one in Egypt is going to allow fraudulent and manipulated elections," says political analyst Diaa Rashwan at the Al-Ahram Center for Political and Strategic Studies. "They searched for their freedom and now they have it."

So who are the contenders for president? Taking cues from who's who among the protesters' heroes in Tahrir, you can start with the usual suspects.

At the top of the list may be Amr Moussa. State TV reported Friday that the former Egyptian foreign minister would be stepping down as Secretary General of the Arab League, where he has served for nearly a decade, renewing speculation over a presidential bid. The long-time diplomat has a large popular following in Egypt because of his habit of publicly criticizing policies of the U.S. and Israel, in marked contrast to Mubarak's quiescence. And he may be the only contender praised in a chart-topping song. Moussa made local headlines over a year ago when he demurred on the question of whether he would make a bid for the presidency, and his name has been at the tip of many tongues in Tahrir Square. "All of Egypt loves Amr Moussa," says Ali Hassan, a 21-year-old student. For Egypt's allies, Moussa may have the added appeal of being "not far from the establishment," Rashwan says. "That will be a kind of guarantee to international powers that Egyptian foreign policy will be stable." (See the 2009 discussion about an Egyptian successor.)

But there's also wildcard Mohamed ElBaradei, the nobel laureate and former head of the International Atomic Energy Agency, who captivated Egyptian and foreign media with his return to Egypt early last year to mount a fresh challenge Mubarak's dictatorship and abuses. ElBaradei commands a loyal youth following and launched the National Coalition for Change, the first broadly based campaign calling for constitutional amendments and an end to the regime. His followers have campaigned hard to promote him as a possible presidential candidate, despite ElBaradei's evasiveness on the subject. But his forays into the protest movement have been limited; the bespectacled reformist tending to tweet his dissent more often than physically acting it out. And many Egyptians still say they don't trust a man who spent much of his career abroad to make the call. "ElBaradei has lost credibility," says opposition politician Hamdeen Sabahi. "He is not really connected to the country and its people." Others have gone so far as to accuse ElBaradei of trying to hijack the revolution.

For some, the imperfect opposition leader they know - such as Ayman Nour, who ran against Mubarak in 2005 in the first multi-candidate presidential race and was subsequently jailed by the regime, slandered by state media, and stripped of his license to practice law - is a safer choice than the one they don't know. "The difference between Ayman Nour and ElBaradei is that one is a real Egyptian and the other is more of akhawaga [foreigner]," says Abdel Hamid Osman, a demonstrator. Nour commands a small army of loyal young followers, and has vowed to run in the 2011 race. On Saturday, he passed out copies of his personal draft for the new constitution. "Of course yes," Nour says of when asked if he intends to run. (See what was going through the mind of Mubarak when he was in power.)

And then there are the lesser known figures that have emerged in the course of Egypt's momentous 18 days.Yahya al-Jamal, a retired head of the constitutional court may be too old some say, but others want him to lead the way to constitutional reform. "He's the spokesman for the revolution," cried one bystander excitedly, as Jamal moved through the crowd in Tahrir last week. Other prominent judges, Mahmoued al-Khudairy andZakaria Abdel Aziz, have also attracted attention for their time spent in the square. And another popular nobel laureate, the chemist Ahmed Zuweil has also returned to his home country to join the cause.

"We have the traditional names," says Rashwan. "But perhaps we will have dozens of new people running. The process of destroying the old regime is already finished." Now, it's time for phase two, he adds: "Building a new regime. And I'm not excluding the chance of dark horses appearing suddenly."

With reporting by Aryn Baker and Yasmine El Rashidi / Cairo

How the administration will get rid of Fannie Mae and Freddie Mac

By Ezra Klein

I mentioned earlier that the administration plans(video earlier today at 10:52AM) to get rid of Fannie Mae and Freddie Mac. But I didn't say much about how they mean to go about doing it. Luckily, Daniel Indiviglio has a nice, clean summary:

One change would be to gradually increase the guarantee fees that [Fannie and Freddie] charge, so that private guarantors would be able to better compete. Another change would be to require Fannie and Freddie to obtain more private capital to cover subsequent credit losses. The Treasury also intends to reduce the size of mortgages that qualify for Fannie and Freddie guarantees. Finally, the administration intends to wind down Fannie's and Freddie's mortgage portfolios, by at least 10% per year.

By Ezra Klein  | February 11, 2011; 5:01 PM ET 

Obama Housing Policy Plan Stronger Than Anticipated

FEB 11 2011, 2:08 PM ET

DANIEL INDIVIGLIO - Daniel Indiviglio is an associate editor at The Atlantic, where he writes about credit markets, regulation, monetary & fiscal policy, taxes, banking, trade, emerging markets and technology. Prior to joining The Atlantic, he wrote forForbes. He also worked as an investment banker and a consultant.

The Treasury released its long-awaited housing finance policy report Friday morning. Leakssuggested that the Obama administration would essentially punt on the question of what to do about the government's role in the mortgage market. That assessment was a little too strong. Instead, the plan did provide three options, but all were variations on a clear theme: the government's role in the housing market will be sharply reduced once a new policy is adopted.
The report (.pdf) begins with a narrative of how the government's involvement in the housing market played a role in the financial crisis. It stressed how the public-private nature of government-sponsored enterprises Fannie Mae and Freddie Mac was intrinsically flawed. It then asserted that these GSEs should be wound down over the next decade or so. This much is clear: under every option the Treasury outlines, Fannie and Freddie will eventually cease to exist.
With that said, however, the government's presence in the housing market will not disappear entirely. In fact, it would certainly remain intact for the affordable housing initiatives through the Federal Housing Authority and other targeted programs, as it had in the past. The big change would be how mortgage funding would be provided for the vast majority of mortgages in the U.S., which have heavily relied on Fannie and Freddie for decades. The Treasury wants the private market to step in and take on most of that funding responsibility and relieve taxpayers of some or almost all of the mortgage market's risk.
Before getting into the three alternative policy possibilities that it offers, the plan explains how the mortgage market would be weaned off of Fannie and Freddie over a period of time. One change would be to gradually increase the guarantee fees that the GSEs charge, so that private guarantors would be able to better compete. Another change would be to require Fannie and Freddie to obtain more private capital to cover subsequent credit losses. The Treasury also intends to reduce the size of mortgages that qualify for Fannie and Freddie guarantees. Finally, the administration intends to wind down Fannie's and Freddie's mortgage portfolios, by at least 10% per year.
The Treasury also provides some guidance on mortgage underwriting and measures to crack down on predatory lending. Perhaps the most surprising assertion was that loans that obtain government backing going forward -- excluding those in designated programs specifically targeting lower-income borrowers -- should eventually be required to "have at least a ten percent down payment." The Treasury also stressed the importance of ensuring borrowers have the ability to pay the mortgages they obtain.
Finally, the plan provided three alternatives to how the government's role in housing finance policy should proceed going forward. The three proposals would all provide government support for programs to help to lower-income borrowers secure housing, as has traditionally been done through the FHA, USDA, and Veterans' Affairs assistance program. These would make up about 10-15% of the mortgage market. So the three alternatives would impact the other 85% of mortgages.
Here's the big surprise: under all three alternatives, the government would have a much smaller presence than it did through Fannie and Freddie prior to the financial crisis. Here's a brief description of each summary:
Option 1: Go Private
The first possibility the Treasury offers is simply the free market model. While the FHA and other such programs would remain in place, the vast, vast majority of mortgages would not benefit from government assistance. For some 85% of the market, there would be no government guarantee in place. Instead, other funding mechanisms like securitization and potentially a covered bond marketwould be in place for lenders to obtain mortgage financing.
Option 2: Crisis Funding Mechanism
The second alternative would provide the option of a government guarantee, but at a price that isn't normally competitive with the private market. As a result, when the economy is in good health, this framework would look a lot like the fully private market, because the government's guarantee pricing would be too high to be competitive. But the plan's impact would be felt when a credit crunch hits and mortgage funding becomes scarce. The guarantee would then provide the opportunity to obtain funding, despite market instability. The fee that wasn't competitive during normal times might also be reduced appropriately to facilitate credit in times of great economic stress.
Option 3: The Catastrophic Guarantee
Finally, there's the alternative that would provide the most, but still limited, government involvement. This plan actually looks an awful lot like one proposed earlier this week by Moody's Chief Economist Mark Zandi. It would essentially create a market where the government would provide an insurance backstop (through reinsurance) that would only be utilized when catastrophe hits -- as it did over the past few years. Mortgages would pay a premium to obtain this insurance, but the first losses (up to some specified percentage) would hit whoever held the mortgage asset, whether it be a bank or investor. If losses exceed that first loss piece, then the government would cover the remainder. The government would use the guarantee fees it obtained to do so. That way, theoretically, taxpayers would not be harmed. Think of this as a little like depository insurance, where there's a fund in place paid for by insurance premiums that the government uses to cover losses.

From the standpoint of someone who has been closely following the housing finance policy debate for some time, this report is surprisingly aggressive. Even though the Obama administration doesn't take a firm stance on the best specific housing policy framework, it clearly sets the tone for the debate going forward. Any hope that the government would still maintain a full mortgage guarantee for most of the mortgage market may be dead. This will likely frustrate the real estate industry, banking lobbyists, and mortgage bond investors. But it's ultimately pretty good news for taxpayers. Even in the third option, where the government has the biggest role, taxpayers should have far less risk than they did through the system in place prior to the financial crisis.
So really, the Treasury has taken a pretty firm stand against heavy government involvement in the housing finance. Going forward, the debate won't focus on how much government support the mortgage market will enjoy, but how little.

It's all about Dodd-Frank

Posted at 8:53 AM ET, 02/11/2011

By Ezra Klein

Fannie Mae and Freddie Mac will be wound down. The government will continue to use taxpayer money to make it cheaper and safer for Americans to take out mortgages on home purchases. The administration is offering a range of options for how that commitment will be structured in the future, as they don't want to commit to any one path only to see the Republicans tear them apart for it. Those, I think, are the headlines out of the Treasury Department's new report on the future of housing finance. But I'd add one more: The implementation of Dodd-Frank really, really matters.

Beyond the basically insane structure of Fannie Mae and Freddie Mac -- private institutions with lobbyists, profit motives, and the protection of an unarticulated but widely acknowledged government guarantee to cover their big losses -- the administration's diagnosis of what went wrong in the housing market speaks much more to issues dealt with in the financial-regulation law than issues included in their three options for reform of the government's system of housing finance and insurance.

The story they tell begins in the consumer market, where inadequate protections and incompetent regulatory oversight allowed the brisk trade in bad mortgages to people who couldn't afford them to take off. It then moves to the opaque and underregulated finance system, where the banks were packaging products they didn't understand into securitized bonds and selling them off so quickly that they stopped worrying about how risky they were, and where regulators didn't see what was going on and thus didn't demand the banks hold enough capital to protect themselves from the inevitable reckoning.

Fannie Mae and Freddie Mac were part of this story, of course. But they were late to the party. They only got into the riskier stuff in 2006, while the rest of the financial industry had been playing in the mud since 2001. Reforming them can help mitigate a housing crisis in the future. But given this chain of events, it can't prevent it.

The root causes will be fixed -- or not -- in Dodd-Frank. It's up to the Consumer Financial Protection Bureau to strengthen the weak consumer protections that allowed these mortgages to be sold in the first place. Regulators will have new powers to force financial players -- particularly the megafirms whose failure threatened the whole system -- to hold more capital as a buffer against bad times. Banks won't be able sell off all their risk because the law says they have hold five percent of the risk of any product they originate -- though as Bethany McLeannotes, that's not true when the product consists of "qualifying residential mortgages," and it's up to the regulators implementing Dodd-Frank to define what a qualifying residential mortgage is.

That's not to say reforming the way the government structures its presence in the housing market doesn't matter. It does. But the government isn't looking to dramatically change the role they play in the housing market. They're just looking to get away from poorly designed institutions like Fannie and Freddie. The real action -- the work that could prevent another crisis -- is still in Dodd-Frank, where many of the questions central to how the housing markets works going forward haven't been answered, and where many of the rules that might stop it from blowing up again have yet to be written.

Photo credit: Susan Biddle/Washington Post.