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There are two OpEds in today’s New York Times regarding the GSEs. One of them is full of insight and intelligence and rationality.

The other is by John Carney.

The insightful column, Say Goodbye to Fannie and Freddie, was written by former St. Louis Fed president Bill Poole.

During the credit bubble and housing boom, the Alan Greenspan led FOMC was terribly irresponsible in their actions and inactions. But there were two voices of reason at the Fed: Ed Gramlich and Bill Poole. Both were unfortunately ignored by the Maestro (as he was then known). Gramlich warned against subprime loans and predatory lending, while Poole was a sharp critic of the GSEs.

I cited Poole in Bailout Nation for “his many cautionary warnings about the GSEs.”

As to the less insightful OpEd, well, John and I have disagreed about this — and other things — for years. He seems to prefer talking points to data; he started putting the crisis blame on the CRA, before he moved on to blaming the GSEs. His arguments tend towards the blissfully data-free.

In the Times, John begins his column with this misleading statement: “Despite their central roles in the housing bubble, the Federal Housing Administration, Fannie Mae and Freddie Mac now back more than 95 percent of new mortgages.“ (Update: I don’t have a problem with the 95% -post-bailout receivership figure; since the collapse, FNM/FRE are the only game in town). I lose interest when an author’s premise is based on a false talking point, especially one that lacks supporting data.

Far too many electrons have been sacrificed in detailing my views on FNM/FRE, but the short version is they were just 2 more crappy banks — as much to blame as Citi and Countrywide and Bank of America  and Lehman Brothers and Washington Mutual and Bear Stearns and Merrill and . . . well you get the idea. But the talking point that this all was caused by Fannie & Freddie? The data simply is not there.

Regardless of your thoughts on the GSEs, these two OpEds illuminate how — and how not to — write a persuasive editorial . . .

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Sources:
Say Goodbye to Fannie and Freddie
WILLIAM POOLE
NYT, August 11, 2010
http://www.nytimes.com/2010/08/12/opinion/12poole.html

Too Big Not to Fail
JOHN CARNEY
NYT, August 11, 2010
http://www.nytimes.com/2010/08/12/opinion/12carney.html

Previously:
Fannie Mae Looks Like Hell (November 16th, 2007)

Blaming Greenspan (June 2007)

Subprime Mortgages: America’s Latest Boom and Bust (May 8th, 2008)

Poole: Save Fannie/Freddie, Then Dismantle Them (July 27th, 2008)

Misunderstanding Credit and Housing Crises: Blaming the CRA, GSEs (October 2nd, 2008)

Fannie Mae and the Financial Crisis (October 5th, 2008)

CRA Thought Experiment (June 26th, 2009)

Who is to Blame, 1-25 (June 29th, 2009)

$100,000 CRA Challenge (June 29th, 2009)

Get Me ReWrite ! (May 13th, 2010)

Global Housing Boom (July 20th, 2010)

Initial Jobless Claims totaled a disappointing 484k, 19k higher than expected and up from 482k last week. To smooth out the seasonal adjustment problems in July this year because some auto plants shut down and others didn’t, the 4 week average moved to 474k, the highest since Feb. Continuing Claims, up to 26 weeks, fell by 118k but Extended Benefits rose a net 1.33mm in response to the government’s extension of unemployment insurance, in some states back to 99 weeks, where those that temporarily fell off were able to come right back. Bottom line, seasonal distortions or not, initial claims are still too high and point to a still lame labor market.

Following the July 21st comment from Bernanke that “the economic outlook remains unusually uncertain,” John Chambers of CSCO followed up last night with “we are seeing a large number of mixed signals in both the market and from our customers’ expectations, and we think the words ‘unusual uncertainty’ are an accurate description of what is occurring.” Greece, the poster child for sovereign concerns, printed their 7th q/o/q GDP decline in a row, this time by 6% annualized and worse than expectations of a drop of 4.4%. Their unemployment rate is at 12%. Ireland, which saw selling in its debt yesterday due to worries of the cost of bank bailouts, sold 6 and 9 mo paper at yields about 100 bps above last month. With the Yen near 15 yr highs, the Japanese Finance Minister said he doesn’t like it. After their miserable failure of intervention in ’04, jawboning will be their main tool to weaken it.

A few weeks ago, I mentioned we were 50% long, 50% cash (up from 100% cash in May), and were planning on selling into any rallies. Since then, we have sold some winners outright (PWER), cut back other positions, and been stopped out completely of losers; win some, lose some. We are now approximately ~85% cash.

The reason I bring this up was to share with you two reactions I got when describing these recent trades and cash holdings. I had two separate conversations in July — one with a well known Trader, the other with a Fund Manager (known in the industry, but not a household name) — about our posture prior to yesterday’s drop.

The two responses were polar opposites, 180 degree apart.

The trader respected the discipline of honoring stop losses. Good traders know that opportunistic speculation is a process. Ignore any one single outcome, focus on the methodology that can consistently avoid catastrophic losses, manage risk, preserve capital. A good process can be replicated, a random spin of the wheel cannot.

The fund manager, who was having a decent year being long high vol names (at least before Wednesday), was having none of it. “Stops are for losers” is a quote I shall long remember (and email him after he blows up). Apparently, real men have the courage of their convictions.

These two conversations were in my mind when I stumbled across a post at the Less Wrong blog; its a site dedicated to “refining the art of human rationality.” One of the things we humans do is come up with short cuts and heuristics — experience-based techniques that help in problem solving, but often contain unwarranted assumptions.

The post Five-minute rationality techniques mentioned a quote we are all familiar with: “It takes a big man to admit he’s wrong.”

Stop to consider that quote for just a minute, and you will realize how silly it is. If we are honest with ourselves, we will have to admit that all of us are wrong about something every single day. The daily details of life are filled with our own errors: What will happen today, the best route to take to work, anticipating a colleagues reaction to something, the weather, etc.

Investors are just as wrong just as often, including errors on the really big things: An assumption we made about a major issue, a small but crucial fact we misremember, a forecast we made 6 months ago — just some of many things we believed that were all wrong. Consensus for earnings, econokkmic reports, how the markets behave. Expectations are rarely made, consensus is frequently off. We are habitually, regularly, predictably wrong about nearly everything.

Rather than fight our foibles, people should admit to themselves that this error stream is real. Why not repair the errors of our ways as soon as we discover them?

I have noticed over the years the difficulty some investors have in cutting losses, admitting an error, and moving on. Way back in 2005, I wrote a piece advising people that they should Expect to Be Wrong (originally published 04/05/05). In it, I noted that “I am rather frequently — and on occasion, quite spectacularly — wrong.” However, if we expect to be wrong, then there should be little or no ego tied up in admitting the error, honoring the stop loss, then selling out the loser — and preserving capital.

Which brings us back to the hubris of the aforementioned fund manager. I see three error related problems he is suffering from:

1) He is focused on short term outcomes, rather than longer term processes;
2) He does not believe he is wrong, or apparently, deluded himself into thinking he cannot be wrong;
3) He is unaware of his own meta-error.

This is a recipe for investing disaster. We humans make 6 billion errors per day, at the very least. The biggest one is not acknowledging them . . .

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BTW, the headline of this post is wrong. There are 6.69 billion people on earth; we should reach 7B until sometime in 2011. The management apologizes for the error . . .

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Previously:
2009 Investing Mea Culpas (January 7th, 2010)

How Blind Are We to Our Own Shortcomings? (December 26th, 2005)

The Zen of Trading (June 1, 2005)

Here is last night’s CNBC appearance:

Starting at the 4 minute mark

Airtime: Wed. Aug. 11 2010 | 7:05:0 10 ET

Discussing Cisco’s shares slumping after hours and the market sell-off, with Arthur Hogan, Jefferies; Barry Ritholtz, Fusion IQ; Jim Lacamp, Macroportfolio Advisors and CNBC’s Herb Greenberg.

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Back on the Kudlow Report at 7:00 pm this evening to discuss the Fed, today’s big market drop, and maybe even some housing.

Here is food for thought regarding the Fed action, via (former)  Dallas Fed Prez Bob McTeer:

The FOMC’s decision to limit the shrinkage of its balance sheet is modest indeed since allowing any shrinkage is, in effect, a tightening of monetary policy. They didn’t adopt easy money; just less tight money.

People argue that other things are more important in getting the economy moving again: removing the threat of major tax increases; removing the threat of major regulatory burdens, etc. Okay, but fixing those things are not an alternative to monetary measures. They are a complement. Do both. It really doesn’t matter which would be the stronger medicine.

It is important to remember that the Fed did not ease monetary policy yesterday. It acted to limit the tightening that would automatically have taken place with the run-off of mortgage backed securities. It may not be enough. We need gradual growth in the balance sheet to support gradual growth in the money supply. (emphasis added)

As always, it should be fun.

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UPDATE: August 11, 2010 7:30pm

That was fun.

(I always feel like  I am speaking to quickly, trying to get everything out in 30 seconds. The beauty of radio is you get time to discuss things in more details).

I’ll post the video whenever it shows up online . . .  (Video is posted here)

The professor of economics on America’s banking reforms, the risk of deflation in advanced economies and China’s growth

I love this paragraph from Bloomberg‘s Caroline Baum:

“What we had was a government-prescribed course of amphetamines (to keep it up), antibiotics (to prevent infection) and antidepressants (to make it feel better). It endured regular steroid injections from both monetary and fiscal authorities. And it still has no real muscle.”

Awesome . . .

In the first Treasury auction in the new phase of the Fed debt monetization program, the 10 year yield at 2.73% was about in line with the when issued level and the bid to cover of 3.04 is a touch above the 12 month average of 2.99. The helping hand of Fed expressed economic worries and outright purchases of Treasuries has clearly further distorted the US Treasury market, thus making any analysis of it at this point difficult to make in terms of what participants really believe rather than what they feel comfortable buying because the Fed says so. A big part of inflation or deflation is the expectations of it in the future as that alters current behavior. Is the Fed’s obsession with fighting deflation feeding market expectations of deflation that markets wouldn’t have felt on its own? Can’t we just be in a low inflationary time with deflation in some things and inflation in others that doesn’t warrant panic responses from the Fed.

With 3 hours to go in the trading day, we have an interesting looking chart in the SPX:

As noted earlier this morning in our LookOut Below post, the markets have been making up most of their morning losses over the past few weeks. On opening gap downs, the lows of the day seem to be made in the first 20 minutes.

Not so today: The market gapped down hard, and kept going. The break of the recent trading rhthyms could be very significant going forward; it means the hopes for a sharp market rebound are being dashed.

SPX Intraday, August 11,2010

click for larger chart