There has been an enormous rise in wage inequality over the last three decades. Most economists attribute this increase in inequality to the increased premium that highly valued skills can command in a globalized economy. Fannie Mae (along with the rest of the financial sector) is working hard to prove these economists wrong. Daniel Mudd, the CEO of Fannie Mae, has earned tens of millions of dollars in this position over the last three years. In exchange for this extraordinary compensation, more than 1000 times what a minimum wage earner pulls down, Mr. Mudd pushed Fannie in bankruptcy. How many minimum wage earners could do that? The Post gives an inside look at some of Mr. Mudd's incompetence, although it covers up his ineptitude by wrongly describing the decline in house prices. The article reports that Fannie Mae performed stress tests on its portfolio of subprime mortgages and concluded that it faced little risk. According to the article, the stress tests assumed that house prices would fall by 5 percent for two years. It then asserts that: "the deterioration in home prices has not been as extreme as the hypothetical "stress test" scenario." This is not true, according to the Case-Shiller index, house prices fell by 16.2 percent in the one and three quarters years since prices peaked in the second quarter of 2006 (data for the 2nd quarter of 2008 is not yet available). Price declines have been even sharper for lower priced homes that were likely purchased with the subprime mortgages. It required extraordinary incompetence not to recognize the housing bubble even in 2007 after prices were already declining. However, according to this article, Fannie Mae was still buying more subprime mortgage backed securities at this point. Any normal worker would be fired in a second for such incredible incompetence, however Mr. Mudd is still in his job drawing a seven figure salary. Furthermore, no one seems to view this as strange, which suggests that it is common to have people with no skill whatsoever in the very highest paid positions in our economy.
--Dean Baker
