Crisis and Crunch
To go on to further inflation, whether by free banking, intro-convertible bonds, or direct issues means simply bankruptcy and repudiation. Each new issue will produce, only for a time, ease and apparent prosperity, to be followed in a few years by a new crisis and new distress, then a new issue, and so on over again. Reform will then be no longer possible, and we must run the course to its end, in which the paper disappears as ignominiously as the continental notes. Sumner, A History of American Currency
So, Bill Gross and Paul McCulley - perhaps aided by a few harsh words on the part of the USA's official foreign sponsors - finally got their way and the GSE's were officially given a 'credit wrapper' which will be underwritten by some combination of the Federal government's future tax revenues and further, Fed-sanctioned monetary debasement.
No mean thing this, either, since the US Federal debt currently stands at $9.7 trillion (if we add the social security liability to the proportion held by the 'public'), while the lower orders of government are on the hook for $2.6 trillion, the newly co-opted FHLB balance sheet amounts to $1.3 trillion, and Fannie/Freddie disport between them $5.3 trillion in mortgage commitments, as well as some $2.4 trillion in derivatives exposure.
At around $19 trillion dollars (ex-derivatives), this amounts to a hefty 165% of residual private sector GDP and well over a third of aggregate household net worth, these being the income and assets which must ultimately bear the brunt of the guarantees now being offered as to this steepling liability's timely service and discharge.
What price a AAA sovereign rating, if such things were judged objectively, one might ask?
Stock markets - led by the financials - have soared on the news (though not, ominously, that in China). The Yen and Swiss have weakened - while poor, battered Sterling (Sterling??) has risen. Gold has managed a modest gain of around $25/oz, while oil has moved uneasily off the five month lows set before news of the bail-out leaked out on Friday.
Thus, we seem to have taken a significant step towards the launch of the Great Re-inflation - a.k.a. FDR Lives!
Comments (6)
Mike D.
and Fannie/Freddie disport between them $5.3 trillion in mortgage commitments
They are only on the hook for delinquent payments and defaults - not the whole amount.
Published: September 8, 2008 1:58 PM
Greg
Did any prominent Austrian economists write about Fannie Mae when it was created, predicting that it would end badly? I remember reading Economics in One Lesson a few years back writing about how the future of rent controls would affect cities like New York. Living there in 2004 while reading it made for a pretty powerful supporting argument for what Hazlitt was saying. I am only a causal reader and don’t really know where to look for a good article/book written at the time specifically about Fannie Mae.
Published: September 8, 2008 2:15 PM
Mike D.
and Fannie/Freddie disport between them $5.3 trillion in mortgage commitments
They are only on the hook for delinquent payments and defaults - not the whole amount.
I forgot that Fannie and Freddie do have $1.59 trillion in long term debt.
It appears that what really did them in was $217billion in subprime and Alt A securities that they bought from Wall Street, and the fact that they were leveraged 50 to 1.
Published: September 8, 2008 2:38 PM
Steve Hogan
Greg,
Here's a prediction from Christopher Mayer from March 2002:
http://mises.org/freemarket_detail.aspx?control=391
A quick Google search would likely unearth other similar warnings.
Published: September 8, 2008 2:40 PM
Christopher Peters
Socialism in this country is really starting to get to another level, IMHO.
Published: September 8, 2008 3:09 PM
A Chinese students
To be honest, I really admire Austrain school for wise forsight. As early as 2002, they can predict the final crunth of morgage gaints. The GSE gives people too much mispreception, for example, they are too big to fall, and omnipotent government can easily rescue these insolvent gaints. In China, all newspapers and networks praise US government's decisively rescue F&F, but most Chinese people don't know, Chinese government brought the largest amout of F&F securities in the past years. These investments are doomed to be malinvestments, and Chinese people will reap a whirlwind, a depression.
P.S :Austrain school has also forcasted the China's great depression, can you provide me a little more information and articles about the coming To be honest, I really admire Austrain school for wise forsight. As early as 2002, they can predict the final crunth of morgage gaints. The GSE gives people too much mispreception, for example, they are too big to fall, and omnipotent government can easily rescue these insolvent gaints. In China, all newspapers and networks praise US government's decisively rescue F&F, but most Chinese people don't know, Chinese government brought the largest amout of F&F securities in the past years. These investments are doomed to be malinvestments, and Chinese people will reap a whirlwind, a depression.
P.S :Austrain school has also forcasted the China's great depression, can you provide me a little more information and articles about the coming collaspe?
Published: September 8, 2008 11:43 PM