The Great Depression Online

Great Depression Online Archive Issue:

An Unmitigated Disaster

Great Depression Online
Long Beach, CA
July 25, 2008

Inside This Issue You Will Discover…

*** An Unmitigated Disaster
*** Not Just Any Old Bailout
*** The Preeminence of Democracy
*** And More

An Unmitigated Disaster

‘Too big to fail’ has been the popular mantra for justifying the Fannie Mae and Freddie Mac bailouts.  Like any bumper sticker bunkum, if it’s repeated enough times people come to believe it.

But the problem with this mantra is that its hypothesis is flawed.  For Fannie Mae and Freddie Mac already have failed…they are insolvent.  The bailout will just allow them to continue failing at the public’s expense.

Jim Rogers, the legendary investor and author, got right to the point in a recent Bloomberg Television interview…

“It is an unmitigated disaster”, said Rogers. “Taxpayers will be saddled with debt if Congress approves (U.S. Treasury Secretary) Henry Paulson’s request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac.”


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“These companies were going to go bankrupt if they hadn’t stepped in to do something, and they should’ve gone bankrupt with all of the mistakes they've made,” Rogers said.  “What’s going to happen when you put some Band-Aids on it for another year or two or three?  What’s going to happen three years from now when the situation’s much, much, much worse?”  

“They’re ruining what has been one of the greatest economies in the world,” said Rogers.  “Bernanke and Paulson are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this.”

Not Just Any Old Bailout

It’s real simple.  Fannie Mae and Freddie Mac operated under the delusion that housing prices only go up, never down.  Based on this fantasy they lent money to people to buy houses they couldn’t afford. 

Following their misguided logic, it didn’t matter if a borrower couldn’t afford the house, because if they couldn’t pay their mortgage, they could always sell it…and at a profit too.  Plus, as a government sponsored enterprise (GSE), they knew that if they got into trouble they could count on the U.S. Government to come to the rescue.  For they knew what type of business they were in…the business of privatizing profits and socializing losses.

We all know what happened.  House prices went down and foreclosures went up.  In other words, the assets backing the loans keeled over. 

So this week, the wizards in Washington concocted a bailout.  But it wasn’t just any old bailout.  It was a brew of election year pandering and a blank check for the U.S. Treasury.  Julie Hirschfeld Davis, for AP, reports…

“Rescue legislation sailed through the House on Wednesday aimed at helping 400,000 strapped homeowners avoid foreclosure and preventing the collapse of troubled mortgage companies Fannie Mae and Freddie Mac.

“The 272-152 vote reflected a congressional push to send election-year help to struggling borrowers and to reassure jittery financial markets about the health of two pillars of the mortgage market.”

“The Treasury Department would gain power to extend the government-sponsored mortgage companies an unlimited line of credit and to buy an unspecified amount of their stock, if necessary.  The two companies, chartered by Congress, back or own $5 trillion in mortgages -- nearly half the nation’s total.”

And the price tag for all this?

“Congressional analysts estimate that a government rescue of the mortgage giants could cost $25 billion, but they predict there is a better than even chance it will not be needed.”

We suspect that all $25 billion will be needed, and a lot more.  We don’t have any real analysis to support this assertion; it’s just a hunch…and the simple math that shows that $25 billion is equal to one half of one percent of $5 trillion.  We think it’s possible that more than one half of one percent of the loans they made will go bad.

The Preeminence of Democracy

But everyone in Congress loves a good bailout.  Especially when they’ve earmarked election year handouts for their constituencies.  For it’s the preeminence of democracy in action.

Still, the question no one ever bothers to ask…

From where does the money come?

Why it comes from debt, of course.  It’s borrowed into existence because Fannie Mae and Freddie Mac are ‘too big to fail.’  Yet, the money isn’t free.  It’ll be mysteriously transferred from your savings account through the deception of inflation.

And no entity is ever too big to fail.  Even the chubby U.S. Government and its worn out dollar could be in for a world default. 

It may be just one to two more bailouts away.  But we’d rather not find out.


M.N. Gordon
Great Depression Online

P.S.  Why pay full price for stocks when you can buy them on sale?  When they recover to their true market value you’ve already made profits.  In a nut shell, that’s the premise behind value investing.  But how do you know if a stocks on sale or not.  That’s where top value stock guru Nathan Slaughter can help.  Learn more here: Half-Priced Stocks.


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