Ogre’s Politics and Views

I’m writing this post before the markets open on Monday morning, so who knows what effect the market will have on the information here. But what I’m writing about is the “corporations” of Freddie Mac and Fannie Mae. For those who don’t know anything about these entities, it’s pretty complex. But to make things simpler, they’re corporations that are government-sponsored. In other words, it’s a corporation, but it’s not one that a few people got together and formed with investment money — it’s a corporation that was formed by the government and has government backing.

This corporation also happens to be in business. It’s business is to give mortgages to people who aren’t trustworthy enough to get mortgages. It exists to take serious risks on people borrowing money to get houses — risks so high that individuals and banks run by non-government people don’t want to take them. And these companies have been taking these risks for a long time. They’ve taken so many risks that this corporation now has around $5 trillion worth of outstanding loans.

Most of the other companies that had been formed to take on high-risk loans, such as American Home Mortgage and Countrywide have already gone bankrupt. The only high-risk lender left is Freddie Mac and Fannie Mae. And on Friday, their stock prices dropped to nearly worthless. I guess it’s good that it happened on Friday, as that gives the markets the weekend to wonder and figure out what happens on Monday.

You see, if these companies go bankrupt, there’s trouble. $5 trillion is a lot of money. Investors include lots of foreign countries, too. And if the company goes bankrupt, all that investment is gone. At the same time, the implicit indication has always been there that the US government is backing that company. In other words, if the company is set to go bankrupt, the US government has always agreed to back up that money — which means that if the government does back them up, that’s $5 trillion added to the US debt overnight. And no, the government cannot afford to add $5 trillion in one day (it’s about $9.5 trillion now). After all, they just spent about $6 billion covering Indy bank’s losses.

So what’s a country to do?

Now I do realize that on Friday, the government said that in order to keep the mortgage companies running, the government would just throw (taxpayer) cash at them. With the stock prices so low, the companies need cash just to pay their own bills. So this will be the short-term solution. But how long will this last? I always heard it was bad to throw good money after bad. But since that is bad, I expect the government to keep doing it as long as they can. Why? Because the alternative is worse.

They have two other choices: Either let the companies fail, or take them over.

If they let the companies fail, there will be massive losses around the world in real cash. The value of the US dollar will continue it’s massive collapse, and the word of the US government, economically, will go down. In addition, mortgages will be harder to find and get for people with other than good credit and jobs. In other words, not a whole lot. This would obviously be the best option — and therefore there’s no way the government will take this choice.

The government is more likely to take option #2. That will have the effect of not only adding the $5 trillion to the debt overnight, but it will also completely nationalize the mortgage business. Yes, the government would be in the business of directly loaning money for housing. This is a quick route down the road of socialism, so this is the most likely solution. However, it’s an election year, and that $5 trillion is going to be a HUGE hit.

Therefore, as I see it, the most likely thing that will happen is that the stock will continue to fall until it’s a penny stock. Meanwhile, the government will continue to throw HUGE amounts of (taxpayer) money at the companies. You might hear this called things like “giving them access to discounted funds” or other things that don’t sound like “we’re throwing money at them as fast as we can print it.” The government will likely try and keep the companies afloat until after the election. Then, the new socialist president (either one of them) can just go ahead and nationalize the mortgage industry.

Anyone think I’m off-base here? I sure hope I’m way wrong, but I fear I’m not.’

Addendum: After I wrote the above, the government announced, as I predicted above, that they will just literally throw money at the two companies. In other words, the companies won’t go bankrupt because the taxpayers will continue to give them literally as much money as they need to keep operating. And of course, it’s claimed to be “loans,” but that’s just not entirely true. Other news reports are claiming this is being done to “save taxpayer money.” So yes, in today’s government spending a literally unlimited amount of taxpayer money on a business is “saving” money.

In addition, both socialist candidates for president praised the action. Both McCain and Obama are glad that the government can do more to socialize home ownership. Obama openly said that government should be providing homes for people. If only there were somewhere like Galt’s Gulch where people were allowed freedom.

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Tags: America, News //