Forbes Magazine, The New York Times, and Fox News are among many news services now reporting that there are plans afoot to nationalize Fannie Mae and Freddie Mac using tens of billions in taxpayer dollars. Fox is calling it a "shoring up" of the mortgage industry, although it's an obvious asset grab. The Times is calling it a way to "bolster the economy" and "resolving the credit crisis," which of course is a pretext and not the main motivation. Forbes asks why it's happening at all, as if it were a mystery. It's not a mystery, unless you don't understand the Federal Reserve. So far, most of America remains clueless.
Here's the best clue of all: the expected nationalization announcement is expected as early as Sunday evening. The people delivering that announcement will be Treasury Secretary Henry M. Paulson Jr. and Ben S. Bernanke, the chairman of the Federal Reserve, according to the Times.
What's happening here is that the next card in the Federal Reserve's ongoing plan to keep inflating the economy is being played. Nor will this be the last card played, because the Fed holds all the cards on behalf of their big banking associates.
What's not so clear is how big dollar holders abroad will view this move. Wall Street, of course, applauded it by rallying the share prices of Fannie and Freddie, thereby encouraging all shareholders to shoot themselves in the foot (or worse). That was to be expected. The question that even Ben Bernanke can't answer yet is, "Will the foreign dollar holders, the ones who hold most of the U.S. debt in the world, also applaud the move?" If they do, the Fed will probably get away with this power grab, at the expense of the taxpayers.
Of course, they won't call it nationalization. They won't even call it a bailout. They'll use high-sounding phrases like the ones that Fox News and the Times are using, because those are the words the banking interests gave to the major news organizations in the first place.
What's particularly weird about the Forbes headline...why now?...is that the article doesn't actually explore that question. This means that Forbes really knows why, but they don't want to say. In fact, the article includes a very significant paragraph:
"Reports circulating Friday night have the two companies entering conservatorship, which would nearly wipe out equity holders but preserve the interests of debt holders. The chief executives of both companies would lose their jobs, but the companies could continue to operate, with quarterly infusions of capital from the Treasury depending on losses."
This would be funny if it wasn't so sick, because it means that the shareholders of Fannie Mae and Freddie Mac who just bid the prices of those stocks up yesterday are now being recognized by Forbes as likely to lose their collective shirts. They're the "equity holders" that Forbes was talking about, whereas the "debt holders," the banks, are going to be bailed out of their high-risk behavior patterns. As the Forbes article goes on to point out, "A solid federal guarantee would allay investor fears and allow Fannie and Freddie to continue to raise funds as needed." In other words, it will be business-as-usual for the banks, and if the stockholders of Fannie and Freddie who were duped into buying those stocks under the guise that "their investments will be somehow protected" get hurt...well that's not the bankers' problem, right?
What IS the bankers' problem is trying to figure out who will want to keep borrowing more. The real estate industry isn't showing any clear signs of recovery yet, so they must be counting on people holding adjustable rate mortgages to try to refinance them. That way, they could claim that fewer mortgage holders would be at risk for foreclosure.
Meanwhile, the biggest loser in this whole, sickening charade is the taxpayer, who will be doing the bailing out. Even more likely is that the final total of the bailout will be far more than "tens of billions of dollars."
It's time to face up to what's happening here. The dollar is in trouble, and the bankers don't care, because they make their money off the debasement of the dollar. Their Fed puppet, Mr. Bernanke, will gladly conspire with their other puppet, the Treasury secretary, to do their bidding. I'm not describing a new pattern of behavior. I'm describing a pattern of behavior that has existed since the Fed's creation in 1913, a pattern that keeps getting worse and worse year after year, decade after decade.
How much longer the Fed's smoke-and-mirrors act will continue to work is anyone's guess. I'm betting that it's going to work a little longer, but I'm not betting that way in the long run.
In the meantime, I invite those of our good readers who understand what the Fed is really doing to join our project to explain the Federal Reserve to the public. We have a collaborative online book project that is just getting underway at Federal Reserve News. An outline of chapters has been established, and volunteers are taking on the task of writing chapters from that outline. More help is needed, so drop by the site if you have time and understanding of the issues involved. Austrian economics supporters are particularly invited to contribute.
©2008 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Saturday, September 6, 2008
Last modified: Saturday, September 6, 2008
The views expressed in this article are those of Walt Thiessen only and do not represent the views of Nolan Chart, LLC or its affiliates. Walt Thiessen is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: Christopher Espinal
Date: 2008-09-06 09:21:00
Yeah...that would certainly be disastrous!
Posted By: Maria Folsom
Date: 2008-09-06 16:07:57
Good explanation. But now what do we do as taxpayers? As Libertarians? Any suggestions for the common person who neither owns such bogus stock nor needs a new mortgage, but pay taxes?
Posted By: Jake, the champion of the constitution
Date: 2008-09-07 01:17:38
Walt –
One interesting thought on nationalization and a comment
From the Economist, July 17:
“[N]ationalisation . . . would bring the whole of Fannie’s and Freddie’s debt onto the federal government’s balance sheet. In terms of book-keeping this would almost double the public debt, but that is rather misleading. It would hardly be like issuing $5.2 trillion of new Treasury bonds, because Fannie’s and Freddie’s debt is backed by real assets. Nevertheless, the fear [is] that the taxpayer may have to absorb the GSEs’ debt . . . . That suggests yet another irony; the debt of the GSEs has been trading as if it were guaranteed by the American government, but the debt of the government was not trading as if Uncle Sam had guaranteed that of the GSEs.”
I think you are missing a very important angle – the FNM/FRE derivatives. All of these derivatives can now be supported by the persons with no voice – I am referring to the American taxpayer. The consequence will be government inflation of the money supply, and, for the “big money” people who are in tune with what Congress is doing, they will make money on the backs of the aforementioned taxpayers while we see massive shifts up and down in the dollar, ever-increasing M3, etc. Mainly, this will manifest itself in inflation.
But for the above to be true, the only question to be answered is how much in FNM/FRE derivatives are there? This, I do not claim to know, but trillions would not be shocking as the derivatives universe is in the neighborhood of 1.1 quadrillion USD. Reportedly, these gamblers are hedged (ie bet against) with a Fed interest rate hike, which is just freaking great.
Maria Folsom -
Perhaps Walt will answer differently, but besides not being ignorant of what this nationalization will mean, be politically active on the local level, but on the financial side, what this means for all of is more debasing of the dollar and inflation. I suggest owning physical gold (definitely not paper gold that you can't see or touch and perhaps silver) but do your homework first, don't just trust what I write, but in my opinion these markets are completely rigged., and focus on the number of grams you own, not the USD price. The dollar price of gold has dropped maybe 10% recently and silver 30%., but what doesnt make sense is that supply for investors is very limited. Don't plan to get rich, just maintain your purchasing power, and protect your family. Both Walt and I write about this stuff from time to time. Here's a recent article from Republicae http://www.nolanchart.com/article4732.html
Posted By: Walt Thiessen
Date: 2008-09-07 01:19:25
Chris: yes it is certainly disastrous. The entire financial system of the United States (and of the world) is based on legalized counterfeiting, with the counterfeiters (the Federal Reserve and their commercial banking partners in this country and fellow central bankers abroad) continuously reaping the rewards of counterfeiting by siphoning the wealth out of the hands of those who create it into their own pockets. Then, when the counterfeiting becomes too great, they get bailed out by the government. Yes, it's an ongoing disaster, and it is certain to get worse.
Maria: the answer to your question is education on a massive scale. As I described to Chris, we must expose the counterfeiting ring for what it is. Until Americans understand that they're being robbed blind, they will not clamor for an end to fractional reserve banking. I'm glad you signed up for an account at Federal Reserve News. Perhaps you might be willing to help put together our book? It's the first step in our campaign to educate America.
Posted By: Walt Thiessen
Date: 2008-09-07 01:29:49
Jake: I couldn't agree with you more about the derivatives. I'm not missing them. I'm well aware of them. I just didn't think to include them in the article. I have to admit, I kinda touched quickly on all the highlights I could think of as I was writing it, and I forgot to include that point. The key point with the derivatives is that there are so many of them and that they are all written differently with different goals. Inflation is almost certainly a common weakness that they're hedging against, but what no one can say is what happens if they're ever broken apart...which is exactly what may have to happen before the current crisis is over. What we can be sure of is that the Fed counterfeiters (also known as bankers) will certainly continue to inflate the economy. As you observed: "just freaking great."
Holding gold is great if you've got the money. If you don't, though, you can still help by helping with our collaborative book, as I said to Maria. In fact, you can help even if you do own gold! :-)
Posted By: Jake, the champion of the constitution
Date: 2008-09-07 08:23:03
Walt -
Will do, just want to finish a few article in my money matrix series, they bear on the fed as well. Took a brief look at the site, I think the bibliography is no good as many of the sources are not free. If you look at this article http://www.nolanchart.com/article4396.html
and add some of these links. We need to take advantage of the free stuff on the internet, not everyone will be interested in throwing down $$$ and waiting to receive a book although including what you have so far is OK.
Jake
Posted By: Ben Samuel
Date: 2008-09-22 19:05:35
$700 Bn enough of a monetarist binge? More coming to your neighborhood shortly. Russian ships in Venezuela; government in Ukraine about to change its affiliations, and the auto companies and Fannie Mae and Freddie Mac have been moved to page 30...
Ben Samuel