I can’t let the Federal take-over of Fannie Mae and Freddie Mac pass without comment. The federal government has now crossed a new threshold of fiscal irresponsibility, making a quantum leap from its old paradigm of pretending that one day we’ll balance the budget and pay down the national debt, to a new paradigm of doling out mortgage money with reckless abandon, not caring if and when it ever gets it back because it’s the taxpayers who will be on the hook. Our national debt has jumped overnight from $10 trillion to $15 trillion.
Last night, Treasury Undersecretary Ryan was interviewed on PBS’ Newshour with Jim Lehrer. He was asked whether the federal government would operate these companies now with the well-being of the taxpayers in mind, or whether it would loosen lending standards even further in order to carry out its mandate of stoking the economy with mortgage money. He squirmed a little and tried to take the tack that, now that the government has restored investor confidence, Fannie and Freddie will have no problem pouring money back into the mortgage market. When asked whether the government has created a “moral hazard” problem (giving investors the perception that the government will always bail them out), he replied that, since stockholders took a big hit and since the CEO’s were fired, the moral hazard issue was adequately addressed.
But bondholders were bailed out. Why? I think it’s obvious. Bonds are the mechanism the government uses to fund its deficit spending. It doesn’t dare risk investors getting even an inkling that their bond investments may ultimately be defaulted upon by the federal government. Wiping out the bond investors of Fannie and Freddie would have done exactly that. It would have sent the message that the U.S. government can’t be relied upon to pay its debts. That would result in a rapid melt-down of the whole global economy.
The root cause of all of this is quite clear. The trade deficit has drained so much money from the economy that there is nothing left. The only way to keep the economy running is to print boat loads of money and pass it out to everyone in the form of “loans,” which the government knows full well will never be repaid. Not to worry! We’ll just print more to replace it! Sure, this will continue to drive down the dollar and stoke inflation. But we have an answer for that, too! We’ll print even more money!
Well, it isn’t going to work. The reason Fannie and Freddie failed so quickly, only weeks after Congress was reassured by Bernanke that they had plenty of money, was because their source of “capital,” our foreign creditors, have gotten wise to our financial problems and were no longer willing to pour money down a rat hole. This will only accelerate the issuing of bonds by the Fed, and it won’t be long before they grow leery of those as well. The sell-off of America will now accelerate dramatically, but will take an ominous turn as our foreign creditors shun our bonds and start demanding hard assets – anything and everything, including federal land. With all of this will come more foreign control.
It’s so sad to see what’s become of this country. I thought that things were bad in 1979, following the Vietnam War, Watergate and the Iran hostage crisis. For those too young to remember, that was a really bad time for Americans. It was probably the worst we’d felt since the Great Depression. Well, today’s climate is even worse and I’m beginning to think that my prediction of only a recession was too optimistic. I think there’s a good chance that a full-blown depression is on the way. Only a world war and a lot of government spending pulled us out of the last one. This time, it’s the trade deficit and government spending that will start it. This time, there may be no escape.