Uhoh, the GSEs just became TSEs
Big News of a bailout for Fannie and Freddie – investors cheer, the markets rally, but what does it mean to you?
GSEs —> TSEs?
Well, the Government Sponsored Enterprises just became Taxpayer Sponsored Enterprises. The Treasury “bailed” them out, changed their leadership, and is putting Fan & Fred under the management of the Federal Housing Finance Agency. It’s the most radical regime change in global economic and financial affairs in decades, and as economist Nouriel Roubini states “the greatest nationalization in the history of humanity.” He now likens the USA to the USSRA, The United Socialist State Republic of America. Worth a read.
For you, the borrower:
This could mean (slightly) lower rates and greater availability of credit. F&F will now have the cash to buy mortgages from other banks and create more mortgage backed securities to sell off to investors. That means those other banks will have the money to create more mortgages - - that way there’s more money moving about the system. So that’s good for a borrower. If you’re a current mortgage holder, however, you’ll likely see little change.
For you, the homeowner:
Though home prices will continue to fall, the bailout is a potential sign for future stabilization of prices. That’s good for the 1 in 3 mortgage holders whose current mortgage is worth more than his home. Some economists project the market to bottom out as early as the first quarter of 2009; most project early-mid 2010.
For you, the F&F shareholder:
Hm, not sure yet. Though Paulson did make it clear that the TSE’s “will no longer be managed with a strategy to maximize common shareholder returns.” Sure, change the policy now that U.S. taxpayers are the real shareholders…
For you, the national Federal Debt:
The cost of government intervention has yet to be determined, but it will be huge. Upon takeover, we’ve already immediately injected F&F’s $6 trillion into the national debt. Allegedly, a memo that has been recently circulating among economists at the Federal Reserve projects that Federal debt could reach $23 trillion by mid 2010. (It’s currently $9.67 trillion)
For you, the everyday taxpayer:
This is why I say uhoh. As a taxpayer, you’ll be footing the bill. The bailout basically means Fannie and Freddie will have an unlimited taxpayer-funded credit line. This doesn’t mean our taxes will be increased to bail them out - at least not yet. But it does mean that now our government is further in debt – now indebted to hedge funds, domestic and international banks, foreign central banks, etc. The government already put in $1 billion to F&F, and may put in up to $200B more.
And what if the bailout doesn’t work?
If the bailout does not succeed - that is, it doesn’t help the housing or credit markets - well then we’re in big trouble. If the government can’t inject liquidity into the market, then who can?
