The Government Takeover of Fannie and Freddie: Observations of an Unmitigated Disaster
Fannie Mae and Freddie Mac have been taken over by the government. This is an economic calamity of unprecedented proportions. Let me offer a few observations.
First, Treasury Secretary Hank “Bazooka” Paulson should immediately resign. Over the past few weeks as Freddie and Fannie have stumbled through huge losses, Hank went to Congress and stumped for increased authority for regulation over the housing industry. The key feature of this plan was his brilliant idea to extend an unlimited line of credit to the struggling mortgage lenders. This is to say that Hank wanted the power to give infinite amounts of taxpayer money to the two private companies - the concept being that, if the Treasury were equipped with this “bazooka,” investors would have confidence restored in Freddie and Fannie’s securities and debt instruments. Magically, the bazooka would never have to be used, and the economy would be saved.
Congress fawned over the plan, patted Hank on the back for the excellent job, and gave him everything he asked for.
Of course, the plan overlooked the plain fact that both Freddie and Fannie’s business models were losing money hand over fist - investor confidence or no investor confidence. For this reason, Hank’s plan has failed as of today - though you can be rest assured that there will still be infinite amounts of money spent propping up the two companies. This infinite line of credit that we were assured would never have to be resorted to has quickly turned into “periodic capital injections” to cover at least half of any and every loss experienced in the multi-trillion dollar housing crisis.
Second, Federal Reserve Chairman Ben “Helicopter” Bernanke (famous for his comments made in 2002 that he could drop dollar notes from a helicopter in order to keep the economy going) should immediately resign. Artificially low interest rates under his and prior administrations have created the excess of credit leading to various bubbles, including housing. He has also been complicit in lobbying Congress for the Paulson plan, and believes greater regulatory power to the Federal Reserve will solve economic problems even though the strength of the economy is inversely proportional to the strength of the Federal Reserve.
Third, any U.S. Congressperson having supported the Paulson plan should immediately resign. Congress for too long has benefited from the ability to borrow and spend money in a process they do not care to understand, and they blindly and gladly enacted these vast new authorities for the Treasury and the Fed - and even tossed a measure in the bill that forces credit card companies to report your transactions to the IRS. This is the road to serfdom and it must be stopped. Of course, these resignations will never come, as Congress and both presidential candidates have instead tossed out the leadership of Fannie and Freddie as scapegoats.
Fourth, PIMCO manager Bill Gross should be arrested as an accessory to robbery. One of the most outspoken proponents of the U.S. Treasury’s taking control of Freddie and Fannie, Gross deliberately adopted a strategy of entering the mortgage-backed securities market after the credit crisis was in full swing. He now manages a portfolio consisting of 61% mortgages and growing. His strategy: buy fire-sale mortgages and lobby for a bailout that legitimizes his strategy. Today he has succeeded in stealing multiple billions from taxpayers. The moral hazards are now full-fledged disaster areas.
Fifth, financial institutions holding mortgages should sell any morgages or mortgage backed securities immediately at whatever the market will offer. The seizure of Freddie and Fannie have officially signaled a five-alarm situation. This takeover is an indictment of every financial institution holding mortgages on their books, as the two largest institutions have been run into the ground. Why should we expect that national or regional banks will fare any better holding similar financial instruments with similar business models? Furthermore, Freddie and Fannie are now political institutions rather than market actors and government mismanagement will douse the entire marketplace with napalm. Politicians cannot stand the idea of somebody losing a home they could not afford, and insist that every American has an almost absolute right to a home. Even now as the market is demanding (screaming!) for higher mortgage interest rates, the government, with 50% market share and little interest in profit, will hold these rates artificially low, forgive debt entirely, and drive out competitors. These effects could be swift. Immediate liquidation of mortgages may make your bank insolvent, but at least the first to go will be first in line at the FDIC which will be unable to handle all the failures coming down the pipe. It is a matter of time before the U.S. Government holds the other 50% of the housing market.
The Government may soon own both your income and your home. In fact, few homes will be able to be built without Government financing . . . what strings will be attached? (Think about the strings attached to other types of federal funding. The possibilities are endless.)
Sixth, the U.S. debt rating should be downgraded by Moody’s. Freddie and Fannie guarantee $5 trillion worth of mortgage debt instruments. Now the U.S. Government does. In one night, our national debt has essentially grown by 50%. Coupled with the billions in stimulus checks and the untold billions that will be spent in this bailout, the U.S. will probably run a trillion-dollar annual budget deficit. With growing unemployment and a mammoth trade deficit, our nation’s AAA credit rating is a complete joke. I suspect the IMF audit will confirm this if it is conducted with any integrity whatsoever.
Seventh, if this takeover is accepted by congress and the American people, our political climate can be comfortably described as fascist - highlighted by the nationalization of key industries and massive federal investments. This is a move more reminiscent of Hugo Chavez. If politicians can “save the economy” and “keep people in their homes” and “keep people at work” simply by taking control of companies, expect to see the following nationalized in due course (assuming continued economic downturn, and perhaps even in this order): student loans, banks/credit card guarantors, U.S. Auto Industry, U.S. Airline industry, U.S. Oil Industry, and others.
Eighth, Freddie and Fannie stock is worthless and should be unloaded quickly or otherwise stored/framed as memorabilia of a bygone era. I cannot imagine a scenario where the government pays shareholders a penny of dividends as the entities continue to lose money at taxpayer expense. Traditionally, without dividends, stockholders are hoping for growth and/or beneficial sale of the company. One cannot be a partial owner of a government entity (at least not in the financial sense) - any value that is imagined in these stocks is but a faint illusion. I see this takeover as permanent.
This level of government intervention is yet another example of why it is becoming increasingly difficult to store wealth in the United States as the currency is under attack and economic power is politically centralized in reaction to one “crisis” after another. Losses and recessions are a necessary component of a free market. They ensure that investment is properly directed and that malinvestment is purged and poor choices are punished. This is not the philosophy to which our government is adhering. Instead, gains are privatized, losses are assumed by the public, and economic success is a function of one’s political clout.
(5, 2 votes)
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Why even bother calling for resignations? That’s quite naive and I know you are not. These people aren’t going to even go so far as to admit they’ve made an error, let alone destroy their reputations, careers, or hurt themselves financially. And they needn’t. It is clear to me the whole thing has been orchestrated over at least fifteen years.
What I wish could be called for would be massive protest, something like a “conversatives’ general strike,” which would mean your average businessman, your average professional, your average hardworking man on the street, would put their foot down and not go on as if nothing had changed.
Yusef, I call for their resignations because they are incompetent - but it’s done with a cheeky self-awareness that this site is incapable of affecting that result. I advance that position just to contrast how most people believe Bernanke, Paulson, and the House/Senate finance committees are doing a good job. Perhaps in an alternate version I could have suggested instead that they be “burned in effigy,” but I thought it evoked imagery that was unnecessarily violent.
As for being orchestrated over the last fifteen years, I agree, and this statement has powerful implications. We are in an economic situation that is the deliberate result of central planning in at least the form of the Federal Reserve and the Treasury. Indeed, the political nucleus of our economic system is so strong, Bernanke cannot sneeze without the Dow swinging 250 points.
As such our problems are twofold: not only has there been (A) poor orchestration, there is also (B) the power to orchestrate. Whenever A occurs, we get more of B. Whenever B occurs, we get more of A.
How does the endgame play out?
Here’s the way I think the endgame will play out:
http://www.youtube.com/watch?v=rH6_i8zuffs
(You may need to watch all 12 episodes to get the full story.)
The transfer of the banks’ bad debts onto the public was the most crucial step in this process, in my opinion. I think the events in Argentina show us that any notion of such a transfer being in the best interests of the public at large is entirely misguided. If such a transfer in the US is not effectively opposed by us now, it will be much more difficult, next to impossible, to oppose it later.
I thought you might like this article (and the two which link from it,)
http://www.huffingtonpost.com/hale-stewart/freddie-and-fannie-bail-o_b_124713.html