Death of Fannie, Freddie Only the Beginning
By Mr Practical Sep 09, 2008 2:00 pm
The next devaluation will be a doozy.
As the world celebrates the US government's takeover of Fannie Mae (FNM) and Freddie Mac (FRE), a few thoughts from someone who told you 2 years ago that this would happen. For those few who dare to see past the market's immediate positive reactions, this is all a very long-term negative for the U.S. and the world in general.
The following 3 bullet points were written by Alex Barron of Agency Trading Group:
"1. From a philosophical economic standpoint, what the government has done is the biggest move yet in the direction of socialism, and has prevented the free market from working itself out.
What was needed was not a conservatorship, but a restructuring. This means allowing investors who took the risk of investing in Fannie and Freddie in exchange for a potential reward to absorb the losses - not the taxpayers.
This would basically consist of allowing the equity and preferred equity to get wiped out and convert every $1,000 of debt to some conservative combination of debt and equity such as $500 of debt and $500 of new equity. This would effectively allow Fannie and Freddie to become “well-capitalized,” and would also allow the previous debt-holders to absorb future losses in their new equity.
2. From a financial standpoint, what was needed was to completely privatize the economic functions of Fannie and Freddie, not have the government stepping in to buy securities in the open market and helping the GSEs provide more un-economic mortgages.
In order to get out of a hole, you first need to stop digging. So, to get Fannie and Freddie out, the first thing they need to do is to stop buying more un-economic mortgages. As long as home prices are dropping -- and they will continue to drop as long as REO (bank -owned) inventories are growing -- the risk of losing money by lending to someone buying a home exists.
The only way to minimize that risk is by demanding a higher down payment, higher interest rates, and lending only to highly qualified borrowers. A private entity would eventually do this, or else it would go bust. A public mortgage lender will simply continue to lend money at low rates in order to provide “affordable housing” and “expand homeownership” - and have the taxpayer absorb the losses down the road.
3. From a moral hazard standpoint, this sends the strong signal that the government won't require anyone deemed “too big to fail” to pay the piper. Instead, the government will bail them out by simply printing money. This will cause a long line of people to “position themselves,” as Pimco euphemistically put it this morning, for a handout. The amount of inflation that will follow shouldn't surprise anyone.
The first point I've touched on before. The Federal Reserve and any central bank is a socialist institution. It steps into markets when real capital decides not to lend because risk is too high, and then lends taxpayer money (you'll see that this is the case when the Federal Reserve asks Congress to print money to make up its losses)."
I couldn't have said it better myself, so why try?
No positions in stocks mentioned.
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Reply
2008-09-09 14:08:48
Leaving Us?
Say it ain't so, Mr. P, say it ain't so!
It sounds like you're leaving us.
Please don't go.
It sounds like you're leaving us.
Please don't go.
2008-09-09 14:17:05
Thanks...
Thanks for your scrutiny, your oversight and unique perspective.
Best of luck in Japan.
Best of luck in Japan.
2008-09-09 14:24:50
indeed
your genuine wisdom has kept me properly oriented in the face of so much conventional "wisdom" trying to sucker me into the trap.
thanks for that.
your voice will be sorely missed.
i echo the first comment: please don't go!
thanks for that.
your voice will be sorely missed.
i echo the first comment: please don't go!
2008-09-09 14:29:52
Don't Leave
Please don't leave. You are one of the few rational voices out there.
2008-09-09 14:50:02
Wish you would reconsider
Mr. Practical,
Thank you for all the insight.
I wish you would reconsider contributing, as you have been thru what happened in Japan, and it is definitely a unique insight to have.
Also I find the timing (2-3yrs) of the end of the debt unwind to unfortunately be within the time I think oil will be making it's next big run up. This would mean inflation with a capitol I.
Some of us hope not to have to leave the country. Japan is probably a good place to be, as they have already had their major correction.
Thank you for all the insight.
I wish you would reconsider contributing, as you have been thru what happened in Japan, and it is definitely a unique insight to have.
Also I find the timing (2-3yrs) of the end of the debt unwind to unfortunately be within the time I think oil will be making it's next big run up. This would mean inflation with a capitol I.
Some of us hope not to have to leave the country. Japan is probably a good place to be, as they have already had their major correction.
2008-09-09 16:36:41
Debt
Nationalizing Fannie and Freddie is only the first step. A strong independent government could let the market sort it out. Fannie owes China $368 billion. With a projected deficit of upwards of $500 billion, the US government isn't in an independent position. China and other sovereign wealth funds are the US banker. Will China let us borrow to pay them the $368 billion? In banking, that is called kiting. If they are going to take the risk, they are going to demand the reward of ownership. Point? The socialism of the US is just the first step in the transfer of ownership. You have to own it before you can sell it.
2008-09-09 17:29:52
thanks Mr. P! Always enjoyed your opinion. Feel free to drop a line when you see fit.
2008-09-09 17:46:09
as always a great perspective
thanks for the sanity....
wish you were staying,
you will certainly be missed,
aloha from hawaii,
wish you were staying,
you will certainly be missed,
aloha from hawaii,
2008-09-09 18:48:16
Please tell us...
Mr. P.,
Oh mighty wise one... Please DO tell us the meaning of "monetize all debt" - before you go! Seriously!!!
Oh mighty wise one... Please DO tell us the meaning of "monetize all debt" - before you go! Seriously!!!
2008-09-09 19:01:27
"Socialization vs growth"
Looking at things analytically, we live in a closed, finite environment on a single planet with finite resources, delicately balanced.
Eventually, we have to reach a zero growth condition. Since free choice and democratic 'free' markets have been shown unable to moderate themselves, then a zero growth condition requires either no government (collapse) or a socialized type of government.
Unfortunately, what we have is a corporo-socialist government that protects the biggest players in order to 'prevent' the biggest catastrophes. Let's sit back and see how this turns out, shall we? C'monnnn. It'll be fuunnnnnn!
You could'a had a consumption tax system, but Nooooooooooo. "That would be REGRESSive" they said. Maybe not so regressive sounding as a collapsed System NOW...but now is too late, isn't it?
Got food?
Eventually, we have to reach a zero growth condition. Since free choice and democratic 'free' markets have been shown unable to moderate themselves, then a zero growth condition requires either no government (collapse) or a socialized type of government.
Unfortunately, what we have is a corporo-socialist government that protects the biggest players in order to 'prevent' the biggest catastrophes. Let's sit back and see how this turns out, shall we? C'monnnn. It'll be fuunnnnnn!
You could'a had a consumption tax system, but Nooooooooooo. "That would be REGRESSive" they said. Maybe not so regressive sounding as a collapsed System NOW...but now is too late, isn't it?
Got food?
2008-09-09 21:16:52
mr. P leaving
you will be missed. Toddo needs to get on the email and ask, no beg, you to reconsider. You know they have internet and a send button in Japan. please reconsider. ARE you listening Todd?
2008-09-09 21:24:08
Deja vu all over again
Every few years, we go through this same process. We wring our hands and say, "gee, ain't it awful." And then we settle down for the next round. The S&Ls, the airlines, Chrysler, LTCM, Continental Illinois, the list goes on. But the list has been going on for 250 years. Why the great surprise every time it happens? The bulk of Adam Smith's <i>The Wealth of Nations</i> was devoted to a policy analysis of the cozy relations between the crown and the capitalists, then called Mercantilists.
The names have changed, but that's about all. People went to socialism, including our highly attenuated form of socialism, because there was no other choice. They looked into the abyss of free market capitalism and said, "Thanks, but no thanks." The only real effort to have a pure <i>laissez-faire</i> economic system occurred with the victory of the liberal party in England in 1832. It lasted until the 1870's, and nobody this side of Herbert Spencer really mourned its passing. England was in a constant state of low-level civil war in that period, and the economy was a constant alternation between economic euphoria and economic depression. We know the effects on the poor, but the one's it really drove insane were the poor capitalists who played by the rules only to find there were no rules.
Senator Phil said we were a nation of whiners. He may have been correct. After all, in the period from 1853 to 1953, the American economy was in recession or depression fully 40% of the time. since then, it has been in recession only 15% of the time. Further, our "recessions" would hardly even have been noticed in those days; the old recessions were deeper and longer than anything we have experienced since the War. Our great-grandfathers really knew how to suffer. "What a bunch of wusses" they would say to us.
It is the greatest heresy to point out the obvious, to point out what everybody should know by simply picking up a history book or reading the newspapers. And the heresy is this: Capitalism alternates between bailout and subsidy, and has never worked without them. There is not a single example--in all of human history--of this system actually working on its own. It works the way it works because that's the only way it can work. It is not some conspiracy of big bankers, or big socialists, or shadowy imperialists, or what-have-you. It always does this because that's all it can do.
So let us all wring our hands one more and pretend to be shocked--shocked, that there are gov't bailouts necessary to sustain capitalism. But in truth, our problem is not that there is a bailout; it is the opposite. It may be that the problems have become so great that bailouts are no longer possible. After 250 years, you would think we would catch on to how the system actually works. But apparently not.
John
The names have changed, but that's about all. People went to socialism, including our highly attenuated form of socialism, because there was no other choice. They looked into the abyss of free market capitalism and said, "Thanks, but no thanks." The only real effort to have a pure <i>laissez-faire</i> economic system occurred with the victory of the liberal party in England in 1832. It lasted until the 1870's, and nobody this side of Herbert Spencer really mourned its passing. England was in a constant state of low-level civil war in that period, and the economy was a constant alternation between economic euphoria and economic depression. We know the effects on the poor, but the one's it really drove insane were the poor capitalists who played by the rules only to find there were no rules.
Senator Phil said we were a nation of whiners. He may have been correct. After all, in the period from 1853 to 1953, the American economy was in recession or depression fully 40% of the time. since then, it has been in recession only 15% of the time. Further, our "recessions" would hardly even have been noticed in those days; the old recessions were deeper and longer than anything we have experienced since the War. Our great-grandfathers really knew how to suffer. "What a bunch of wusses" they would say to us.
It is the greatest heresy to point out the obvious, to point out what everybody should know by simply picking up a history book or reading the newspapers. And the heresy is this: Capitalism alternates between bailout and subsidy, and has never worked without them. There is not a single example--in all of human history--of this system actually working on its own. It works the way it works because that's the only way it can work. It is not some conspiracy of big bankers, or big socialists, or shadowy imperialists, or what-have-you. It always does this because that's all it can do.
So let us all wring our hands one more and pretend to be shocked--shocked, that there are gov't bailouts necessary to sustain capitalism. But in truth, our problem is not that there is a bailout; it is the opposite. It may be that the problems have become so great that bailouts are no longer possible. After 250 years, you would think we would catch on to how the system actually works. But apparently not.
John
2008-09-09 21:25:26
you gotta do whatcha gotta do
mr. p,
always enjoyed your insights and perspective. i'd join the chorus in asking you to stick around, but it seems like your mind is made up. so with that, just want you to know how much you will be missed.
peace be with you always.
always enjoyed your insights and perspective. i'd join the chorus in asking you to stick around, but it seems like your mind is made up. so with that, just want you to know how much you will be missed.
peace be with you always.
2008-09-09 21:42:14
Please tell us...
Don,
This may certainly be a while down the crooked road, but I wonder if Mr. P's thought about "monetize all debt" infers IMF and a new currency. Whether contrived or from some confluence of events and/or poor decisions the reality of that possibility is seems to be coming into view.
This may certainly be a while down the crooked road, but I wonder if Mr. P's thought about "monetize all debt" infers IMF and a new currency. Whether contrived or from some confluence of events and/or poor decisions the reality of that possibility is seems to be coming into view.
2008-09-09 23:30:48
"The two big Bills, Bill Gross and Bill Ackerman, have already shamelessly begged for their share of the giveaway. They know this is all they are likely going to get." - Mr. Practical
"But in truth, our problem is not that there is a bailout; it is the opposite. It may be that the problems have become so great that bailouts are no longer possible." - John Medaille
"Looking at things analytically, we live in a closed, finite environment on a single planet with finite resources, delicately balanced." - Dan Cornine
The three above paragraphs are all from previous posts on this piece. What to think about all this?
Smart guys, thinkers, obviously. Practical, well, maybe. Let's see: We live in a world of finite resources, bailouts may not be possible, and the two big Bills are going to be ok.
Something is wrong here. For most of my life, I've just focused on my business and haven't worried about macroeconomics or 'the economy'. Now, I have to actually think about the system and Wall Street and Washington. Not because I want to, but because it matters.
Feels, maybe, like it's different this time.
So, is everyone going to buy gold, farms, guns. Both presidential candidates are emphasizing change because a lot of people feel something is wrong, but you are smart guys, and you know that feeling will just be exploited.
I've become cynical in my old age, but there are good people out there. Some of you, maybe. What to do? Figure out how to survive/profit from the situation, or something better.
"But in truth, our problem is not that there is a bailout; it is the opposite. It may be that the problems have become so great that bailouts are no longer possible." - John Medaille
"Looking at things analytically, we live in a closed, finite environment on a single planet with finite resources, delicately balanced." - Dan Cornine
The three above paragraphs are all from previous posts on this piece. What to think about all this?
Smart guys, thinkers, obviously. Practical, well, maybe. Let's see: We live in a world of finite resources, bailouts may not be possible, and the two big Bills are going to be ok.
Something is wrong here. For most of my life, I've just focused on my business and haven't worried about macroeconomics or 'the economy'. Now, I have to actually think about the system and Wall Street and Washington. Not because I want to, but because it matters.
Feels, maybe, like it's different this time.
So, is everyone going to buy gold, farms, guns. Both presidential candidates are emphasizing change because a lot of people feel something is wrong, but you are smart guys, and you know that feeling will just be exploited.
I've become cynical in my old age, but there are good people out there. Some of you, maybe. What to do? Figure out how to survive/profit from the situation, or something better.
2008-09-10 00:42:05
Please tell us...
Hello.
It means that the Government (supposedly that is you and I) prints currency and uses it to pay off debts. Right now, the Government issues debt instruments to retire old debt and to obtain cash to fight wars, build roads, etc. When debt is monetized, the Government just writes a check and, in effect, increases the currency in circulation. Guess what happens to all those dollars you have diligently been saving up? Inflation. Think of the old WWII image of a poor woman pushing a wheelbarrow of currency to the grocery store in post WWII Germany. Golly! What a mess!
I am sure there are better definitions waiting out there...so speak up.
Thanks, Gary
It means that the Government (supposedly that is you and I) prints currency and uses it to pay off debts. Right now, the Government issues debt instruments to retire old debt and to obtain cash to fight wars, build roads, etc. When debt is monetized, the Government just writes a check and, in effect, increases the currency in circulation. Guess what happens to all those dollars you have diligently been saving up? Inflation. Think of the old WWII image of a poor woman pushing a wheelbarrow of currency to the grocery store in post WWII Germany. Golly! What a mess!
I am sure there are better definitions waiting out there...so speak up.
Thanks, Gary
2008-09-10 04:01:23
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
Please consider to contribute one post every month !!!
2008-09-10 05:03:38
Mr. P - Safe Haven?
Great post as always, Mr. P.
I wonder if you would be kind enough to tell us why you have chosen Japan? Is it because you feel it will be a safe haven in the times ahead? Do you have any thoughts on where in the world would be the safest havens should conditions deteriorate in the US as you expect (or will the ripple effect make conditions everywhere just as bad or potentially even worse than in the US)?
jr
I wonder if you would be kind enough to tell us why you have chosen Japan? Is it because you feel it will be a safe haven in the times ahead? Do you have any thoughts on where in the world would be the safest havens should conditions deteriorate in the US as you expect (or will the ripple effect make conditions everywhere just as bad or potentially even worse than in the US)?
jr
2008-09-10 08:13:23
please Mr. P keep posting from Japan!
I'm already jones-ing for your next post!
"The next devaluation will be a doozy"
"monetize all debt" with fiat debt money!
I would love to hear Mr. P's thoughts on gold! Not only during upcomming hyperinflation, but also during the next couple years of deflation. Won't gold shine for both? If deflation causes dollars to become more valuable because of short supply, why wouldn't gold step up as a substitute for purchases (barter) and become much more valuable too? Sure it doesn't throw a dividend, but maybe thats not a bad thing when risk of loss is so high, because of constant intervention.
I understand moving to a place where savings rates are high, because of less social unrest (after all you could go yen without leaving), but many of us can't do such things, and can only hope to preserve as much of our hard earned savings as possible for old age. I used to think if I learned enough about economics and markets I could hold my own trading short or long or cash, but with all the communist intervention going on, I have about lost all hope!
Thanks for all your past commentary MR. P , and I wish you the best of luck!
"The next devaluation will be a doozy"
"monetize all debt" with fiat debt money!
I would love to hear Mr. P's thoughts on gold! Not only during upcomming hyperinflation, but also during the next couple years of deflation. Won't gold shine for both? If deflation causes dollars to become more valuable because of short supply, why wouldn't gold step up as a substitute for purchases (barter) and become much more valuable too? Sure it doesn't throw a dividend, but maybe thats not a bad thing when risk of loss is so high, because of constant intervention.
I understand moving to a place where savings rates are high, because of less social unrest (after all you could go yen without leaving), but many of us can't do such things, and can only hope to preserve as much of our hard earned savings as possible for old age. I used to think if I learned enough about economics and markets I could hold my own trading short or long or cash, but with all the communist intervention going on, I have about lost all hope!
Thanks for all your past commentary MR. P , and I wish you the best of luck!
2008-09-10 08:20:53
Blame Macke
Mr. P he didn't mean it. ____ it Macke, running your mouth on TV has impaired your judgment and sent Mr. P into Thoreau like seclusion in the foothills of Mt. Fuji. You owe everyone an apology and probably Toddo some $ after all the subs churn on this terrible news. I'll save Toddo and Macke a YouTube search for the postmortems. http://www.youtube.com/watch?v=FMBQD-rf4xo
Mr. P now that you're retired perhaps you can reveal yourself, lest we think Ms. Simon was singing about you.
Best wishes.
Mr. P now that you're retired perhaps you can reveal yourself, lest we think Ms. Simon was singing about you.
Best wishes.
2008-09-10 08:52:16
Best of Luck
I've been reading you since 2003, you essentially became my third schooling experience - you've been amazing. I have actually grown because of your writings.
You will be more than missed.
All the best Mr. Succo.
You will be more than missed.
All the best Mr. Succo.
2008-09-10 11:27:14
Please tell us...
Gary,
Doesn't sound too bad, but I don't think I like the inflation part...
Doesn't sound too bad, but I don't think I like the inflation part...
2008-09-10 13:48:02
Thank you...
Thanks Mr. P. Your writings, however disconcerting they may be, have contributed immensely to the Minyanville community and to me personally. I would echo many of the other posts in asking that you please continue to write occasionally. Hard times are no doubt on the way and the clarity of vision you bring to these issues will be sorely needed. In any case, best of luck to you and, again, thank you.
PS - Thanks for sticking around, Prof. Sedacca. If both you and Mr. P departed on us, I think I might be forced to hunker down myself with a gun, the wife's gold jewelry and a few jars of pickles. And I don't hunker well. Too tall...
PS - Thanks for sticking around, Prof. Sedacca. If both you and Mr. P departed on us, I think I might be forced to hunker down myself with a gun, the wife's gold jewelry and a few jars of pickles. And I don't hunker well. Too tall...
2008-09-10 16:40:06
Please explain
I would like at least one more post from Mr. P, explaining *why* he has to stop posting. The timing is too coincidental with the FNM / FRE takeover for my comfort. Did Mr. P. own a boatload of GSE Preferreds?
2008-09-10 17:46:25
Comparative Collapse
This may be of interest to you:
http://www.energybulletin.net/node/23259
http://www.energybulletin.net/node/23259
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