Am I Dreaming? Capital Markets Welcome Fannie, Freddie Nationalization

Monday, September 08, 2008

Gosh, boys, we truly must be in a mess of epic proportions. Sometimes it pays to watch CNBC, and if it is only to preserve my humour in a time when we see daily exemptions from hailed free market principles for troubled financial enterprises. Only 2 hours after star investor Jim Rogers reminded viewers that the government's nationalization of Fannie Mae and Freddie Mac potentially doubled US public debt overnight, US Treasury Secretary Henry Paulson sat in CNBC's studio to calm investors, repeating his statements from the weekend.
You can guess the official stance: Taxpayers will be protected, the housing market will stabilize etc. Oh, and he also said, "this is not something we wanted to do."
He was followed by the world's best investor and richest man, Warren Buffett, who said the Treasury's plan to inject $200 billion into the two companies was the best that could be done. Freddie Mac shares are coming from a 52-week high at $65.88 and were being quoted at $1.50/70 in pre market hours on Monday. 
At that point of time Paulson's predecessor John Snow came on air, providing viewers with a good laugh when he said congress should have done something already in 2004 and 2005. That was the time he ran the Treasury. Readers of this blog may remember that former Fed chairman Alan Greenspan had warned about looming problems of Fannie and Freddie in May 2005 and September 2005.
International stock markets rallied in what will probably soon be seen as a bear market rally as this nationalization certainly does not qualify as a solution to the world's multitude of problems. I wonder if the Dow future can hold onto his pre market 250-point gain for the rest of the day.
Shifting the corporate risk and rewards from private investors shoulders to the big belly of government that has now been running on borrowed fuel (i.e. public debts) since 2001 is definitely not a move to curb moral hazard on management boards.
Something is here fundamentally wrong: Capitalism, the frontier fighter for free markets welcomes nationalization???
A look into history should sober up everybody. The last time US banks were nationalized was in the great depression of the 1930s. European governments had ended up with numerous bankrupt banks after WW2 that were nationalized in order to keep a financial base for the rebuilding of the war-ravaged continent. Nationalization happened even earlier in Russia: During the communist revolution in 1917 banks were the first enterprises the Bolsheviks took control of. With that control bundles of industrial company shares fell into the country's new rulers hands.
As the USA has been marching on an unprecedented path of monetary expansion since 1987, throwing freshly minted Federal Reserve Notes (FRN) on every problem that came along, this weekend's biggest nationalization in history raises fears that big government will continue on this deceivingly dangerous path that will further debase FRNs. Fed chairman Ben Bernanke, always ready to flood the world with more FRNs, said in a statement,
"I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."
What comes next? The world is aware that the big three car manufacturers are de facto bankrupt. Will they be put under conservatorship too? After all they are as vital to an economy as are ailing airlines. Will the fading expenditures of cash-strapped consumers finally lead to whole malls being run by the government as it tries to follow the inflationary rule that all debts can be written off in the long term as long as the fiat money system is accepted by the public?
The cost of the bailout of Fannie and Freddie is virtually zero to the government as it will inevitably be borne by taxpayers. Add a few million more in hush-money handshakes for Fannie and Freddie executives to the potential trillion disaster because no official wants to see the true story become public ever. Bloomberg TV reported that $1.47 trillion in GSE swaps will be unwinded.

Is the USA Ready for a New Deal?
Remembering last Friday's new record unemployment rate of 6.1% it appears as if the current administration has not been on a path of progress since it took office. Disregarding the official GDP figures because of the ridiculous 1.2% deflator we can confidently put the USA on the list of countries in recession - where it meets numerous European countries where the economy appears to fall off the cliff nowadays.
Historical comparisons shine a light on the fact that countries in recession have always had the doubtful joy of growing government intervention.
What is a bit different these days is that it is conservative governments - the former free market advocates - who embark on a socialist path. And BTW, why is nationalization in the USA ideologically "good" while it is "bad" in countries like Venezuela? After all shareholders will get nothing in both places when the state's arm reaches out.
Considering the crumbling infrastructure in the US and a withdrawal from formerly public services (community services e.g. waste, jails, roads) the worsening economic situation could lead to a new New Deal.
Concluding that this nationalization is a stopgap for the current occupiers of the White House, all these pressing issues - and two wars going bad - will be left to the next president anyway. Not exactly a friendly outlook.


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