Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Solution to the Current Crisis- Dissolve Fannie And Freddie

Housing-Market / Credit Crisis 2008 Jul 18, 2008 - 01:14 PM GMT

By: Joseph_Brusuelas

Housing-Market Best Financial Markets Analysis ArticleThe Chinese symbol for crisis also can be expressed as an opportunity. The current collapse of confidence in the domestic system of finance and financial leadership provides such a potential moment. The three part proposal to rescue Fannie Mae and Freddie Mac has bestowed upon our political and economic leaders the responsibility of ensuring that no one company again becomes too big too fail. The crisis requires more than the avoidance of moral hazards. Rather, the solution to the current financial crises and its legislative response requires that no firm or enterprise ever again be permitted to obtain an implicit guarantee of Federal largesse. Fannie Mae and Freddie Mac need to be taken under federal protection, its assets used to cover the risk of the taxpayer bailout and its charter legislatively dissolved.


The initial steps taken by the US Treasury and the Federal Reserve are necessary but not sufficient to engage in the type of systemic reform concomitant with the failure of Fannie and Freddie. Preserving the government sponsored mortgage giants in their current form is exactly the wrong step to take at this crucial juncture. In particular, the blank check that the US Treasury has requested is more than a bit troubling. Even in the aftermath of 9-11, the Bush administration was not given an open-ended account to pursue Al-Qaeda.

Just as important are the implications for the US balance sheet, the US dollar and the interest rate environment should Washington absorb the liabilities of the failed government sponsored enterprises. If the rescue of the government-sponsored enterprises are not handled properly the US taxpayer will find themselves on the hook for trillions of dollars of liabilities, not to mention the outsized risks to the US dollar and higher interest rates that would occur if the rescue of the Fannie and Freddie were to be botched. What is next the monetization of the coming insolvencies at Ford and GM, not to mention the future collapse of Medicare, Medicaid, and Social Security?

We are not surprised that in a real crisis that the socialist paradise that Washington sometimes resembles is advocating a wholesale takeover of Fannie and Freddie. In fact, the discourse emerging from the apologists for Fannie and Freddie has been that the GSE's remain stout and that they represent the last best hope for containing the damage from the implosion in the domestic housing sector. The current approach favoring the use of taxpayer money to preserve the status quo is the very essence of why we stand mired deep in the financial crisis that we do.

It is fair to say that conventional wisdom among the majority in Congress is that both Fannie and Freddie are useful tools for the state to pursue social goals. The market inefficiencies and risk to taxpayer funds from politically based enterprises are legitimate since they to provide the Federal Government to provide low-income individuals with the means to purchase a home. In fact, I expect that in the coming weeks that the usual suspects that have protected Fannie and Freddie over the years will call to make them non-for-profit organizations with public guarantees to protect the financial and political privileges that have accrued to the GSE's and their political clients over the years.

Defenders of the GSE's will state that they have been “private” since the early 1970's and that the backing of the Federal Government has always been “implicit.” We beg to differ. An implicit guarantee is tantamount to being “a little bit pregnant.” Either you are our your not. There is no such thing as an implicit guarantee and the explicit use of taxpayer money that will be used to bailout the GSE's is a function of that “implicit” guarantee.

Given the current level of risk to both the domestic and global system of finance the Treasury needs to act in a much more provocative fashion than it currently is signaling. The Treasury should take the following steps.

First, the US Treasury Secretary through the administration should request authorization from the Congress to put Fannie and Freddie under direct Federal supervision. To specifically protect taxpayer interests, the operation of the twin giants should be directly and forever removed from the political process.

Second, the senior management at both Fannie and Freddie should be removed from their positions forthrightly and the Congress should commission and investigation into exactly how both GSE's arranged to avoid the type of transparency that would have avoided such a calamity. Washington may think that it will be able to buy itself out of this one, but once the public gets a whiff of what the costs of the bailout are going to be some very important political actors on the Hill may not be too excited about their future electoral prospects.

Third, the Congress, the Treasury and the Fed should move with all deliberate speed to set up a 21 st century version of the resolution trust corporation. A move to create a new RTC would get out ahead of the curve of the wave of banks that will fail later this year and in 2009. The Federal Reserve currently has a list of 90 banks on watch for failure and it is imperative that the Federal Government begins to get ready for the probability of a wave of failed banks.

Most importantly, the Treasury and the Federal Reserve should make it clear that any regulatory reform in the pursuit of the notion that any firm that is too big to fail, also applies to Fannie and Freddie. The genuine systemic threat posed by the failure of the GSE's requires that what remains of them in the aftermath of the crisis be privatized. The public should never again tolerate a firm that operates as a privileged enterprise, free from market discipline and able to shield itself from accountability through the deft manipulation of the political process. The role that Fannie and Freddie carved out for itself in the mortgage market was not one of innovation, service or demand, but rather was obtained vis-à-vis its implicit government guarantee. The failure of Fannie and Freddie is not one of the market, but one caused by a government that remains far too large.

By Joseph Brusuelas
Chief Economist, VP Global Strategy of the Merk Hard Currency Fund

Bridging academic rigor and communications, Joe Brusuelas provides the Merk team with significant experience in advanced research and analysis of macro-economic factors, as well as in identifying how economic trends impact investors.  As Chief Economist and Global Strategist, he is responsible for heading Merk research and analysis and communicating the Merk Perspective to the markets.

Mr. Brusuelas holds an M.A and a B.A. in Political Science from San Diego State and is a PhD candidate at the University of Southern California, Los Angeles.

Before joining Merk, Mr. Brusuelas was the chief US Economist at IDEAglobal in New York.  Before that he spent 8 years in academia as a researcher and lecturer covering themes spanning macro- and microeconomics, money, banking and financial markets.  In addition, he has worked at Citibank/Salomon Smith Barney, First Fidelity Bank and Great Western Investment Management.

© 2008 Merk Investments® LLC
The Merk Hard Currency Fund is managed by Merk Investments, an investment advisory firm that invests with discipline and long-term focus while adapting to changing environments.
Axel Merk, president of Merk Investments, makes all investment decisions for the Merk Hard Currency Fund. Mr. Merk founded Merk Investments AG in Switzerland in 1994; in 2001, he relocated the business to the US where all investment advisory activities are conducted by Merk Investments LLC, a SEC-registered investment adviser.

Merk Investments has since pursued a macro-economic approach to investing, with substantial gold and hard currency exposure.

Merk Investments is making the Merk Hard Currency Fund available to retail investors to allow them to diversify their portfolios and, through the fund, invest in a basket of hard currencies.

Joseph Brusuelas 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

6 Critical Money Making Rules