Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fannie and Freddie Bailout Trigger New Chapter in American History

Stock-Markets / Government Intervention Jul 18, 2008 - 11:32 AM GMT

By: Peter_Schiff

Stock-Markets Best Financial Markets Analysis ArticleThis week, with the nation's financial infrastructure crumbling before our very eyes, the nation's top two economic policy makers made their way to the Congress for an extraordinary episode of political theater.  Fannie Mae and Freddie Mac, the quasi-government entities that form the backbone of America's gargantuan mortgage market, appeared to be cracking.  To the somewhat bewildered members of Congress, Ben Bernanke and Henry Paulson offered radical remedies to save the lenders. Despite the fact that the proposed policies would thoroughly redefine America's supposedly capitalistic pedigree, the moves were presented as wholly inevitable, and in the end, benevolent and costless.


If you are looking for a new chapter in American history, it has just begun.

The most memorable moment in the episode came when Secretary Paulson explained that the best way to minimize the chances that Fannie Mae and Freddie Mac will need a government bailout would be for Congress to grant the Treasury unlimited authority to lend to the two institutions.  His analogy: When the bad guys see a bazooka on your hip, you are less likely to be challenged to a gunfight.

At its heart Paulson's argument assumes the GSE's problems are simply a function of confidence.  He believes that if the U.S. Treasury signals that it will stand behind both firms to the bitter end, then investors would have no reluctance in buying their bonds.   But assuring that creditors will be repaid (albeit with cheaper dollars) does nothing to address the root cause of the problem, which is that both firms are losing money on their loan portfolios, and on the loans that they insure.  Paulson's plan actually assures that Fannie and Freddie's losses will be even larger, and puts American taxpayers, or more precisely wage earners and savers, directly on the hook.  The longer these two entities remain in business, the more bad loans they will buy or insure, and the more money taxpayers will lose.

In theory, Fannie and Freddie were originally created to help provide affordable housing.  In reality, like all government programs, they achieved the opposite.  Rather than making houses more affordable, they merely enabled buyers to overpay for them.  The result is that American homeowners are now saddled with staggering amounts of debt, as easy credit made it possible for buyers to bid prices to dazzling heights.  So while a record number of Americans now own homes, they have bankrupted themselves in the process.

Without the help of Fannie and Freddie, and now the full faith and credit of the United States, American home buyers would be facing much steeper mortgage interest rates.  This is particularly true given that our ability to borrow is now dependent on access to the global savings pool.  Without the implicit, and now explicit, government guarantee, foreigners would be much less willing to extend cheap credit to Americans.  If we had to rely solely on our shallow domestic savings pool and individual credit worthiness alone, rates would be significantly higher.  Since home prices are a function of the ability of buyers to pay, higher interest rates would mean lower prices, thus making houses themselves more affordable.

Even the tax deductibility of mortgage interest has achieved a similar result.  By subsidizing home buying, and encouraging renters to become buyers instead, the government has artificially increased demand for houses, causing prices to rise.  In the end, the benefits of the mortgage tax deductions are limited to those who benefit from inflated home prices.  This includes realtors, who earn higher commissions, governments that collect higher property taxes, and those who owned their homes prior to the loophole being enacted who cashed in on the gains.

At present, the best the government can do for housing and the economy is to leave both alone, cease interference in the free market, restore sound money, and allow capitalism to work.

Unfortunately, the laws of capitalism are now demanding that home prices continue to fall precipitously.  But, based on the speed in which our government, public and financial institutions are willing to abandoned free market principals at the first whiff of economic pain, the likelihood that this impulse will take hold is increasingly remote.  So hunker down as the United States finds itself on the express track to state socialism with Paulson's Bazooka locked, loaded and pointed right at us.  When the government pulls the trigger the blast will blow the dollar, and what's left of our capitalist economy, to smithereens.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in