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Your Taxes: Underwriting Your Debt


Insolvency insoluble for Fannie, Freddie.

Minyans shouldn't be surprised by the comments of former Federal Reserve president William Poole: "Congress ought to recognize that these firms [Fannie Mae (FNM) and Freddie Mac (FRE)] are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer."

Some time ago, we challenged the GSEs (government sponsored enterprises) business model, saying they were making extremely thin margins on very heavy leverage: It was highly probable that squeezing those margins would invalidate the business model and cause insolvency very quickly.

To most people, that seemed like an entirely hypothetical scenario when these stocks were thriving and the companies were carefully hiding their Achilles' heels.

Now, it's reality, but it still isn't clear whether the lessons of leverage will finally be learned. Government officials certainly refuse to grasp them, since leverage is their only power. But the market understands leverage all too well, and it's exacting the cure.

The GSEs are the system's poster boys for leverage. Let's not forget how we got here: The Fed drove real interest rates negative (and they're still there), thus making "fake" capital available for widespread borrowing and spending.

Now the debt can't be borne; the Fed's devalued the dollar to death and thus destroyed any wealth the middle class had.

It's breathtakingly cowardly - but then, I expect nothing less from bureaucrats.

We the people, unfortunately, still haven't learned that lesson. We've rolled over and given away liberties to our government in order to "be safe"; now, we're about to give still more power to the bureaucrats who took our wealth away.
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