Sunday, September 7, 2008

In The Time Tunnel With Dean Baker

We weren't going to bring it up, again, that Dean Baker completely blew the Fannie/Freddie call, until we went to his site, where he is taking credit for making the call correctly!!

To pull this off, Baker takes a time tunnel trip back to September of 2002, when he wrote:

If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions
He quotes this in a post today that he titles: Fannie and Freddie Go Under: Yes, This Was Predictable

He starts the post off with this humble beginning:

Okay, this is a bit of gloating. After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.
Now, what really occurred is that Baker completely misunderstood comments made by Paulson just a few weeks back, blew the call and cost anyone who acted on his analysis a lot of money. He wrote:

I have yet to hear any explanation from anyone as to why the government is supporting the share price..

I replied to this with:

I have not seen anywhere a government proposal to give money to shareholders. The Treasury has suggested it may have to buy newly issued stock of Fannie and Freddie to keep them alive, but that is far different than buying shareholder stock.

The next Baker post began with this headline:

Yes, Virginia, Henry Paulson is Bailing Out Fannie and Freddie Shareholders

And, he then wrote, which clearly shows he misunderstood Paulson:

The Treasury is telling the markets that it is prepared to buy shares if the stock of Freddie and Fannie fall below a certain level. Without this commitment, short sellers would see these two bankrupt giants sitting there with positive valuations and push their price very close to zero.

I replied to this nonsense with:

I have not seen, anywhere where Paulson says he wants to bailout shareholders. In fact, Paulson will bailout debt holders, but if it comes to a rescue at the shareholder level where the Treasury comes in to buy newly issued Freddie or Fannie stock, current shareholders will be diluted down to pennies in value, for all practical purposes they will be wiped out. Baker just doesn't seem to get this. It really indicates an alarming lack of understanding of basic finance.

Yes, in some crazy Baker time machine, Baker nailed it. In the real world, it's lucky you are following our analysis instead of Dean "Yes, This Was Totally Predictable--Paulson Is Bailing Out Shareholders" Baker.

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