US Treasury Seizes Fannie Mae and Freddie Mac! And What It Means
"You poor kid, there have been centuries of philosophers plotting to turn the world into just that - to destroy people's minds by making them believe that that's what they are seeing. But you don't have to accept it. You don't have to see through the eyes of others, hold on to yours, stand on your own judgment, you know what that is, IS - say it aloud, like the holiest of prayers, and don't let anyone tell you otherwise." - Ayn Rand by Jake Towne, the Champion of the Constitution
(libertarian)
Monday, September 8, 2008
I have been reading Ayn Rand’s Atlas Shrugged for the past several weeks, so there is a possibility that I am hallucinating, as surely the American government could not possibly be mimicking the socialists, gangsters and looters of Rand’s make-believe government. However, the reality (article from Reuters) is that Fannie Mae and Freddie Mac is surely the largest single financial failure in history. I am also not hallucinating although my views are in direct contrary to the euphoria from the latest article posted at CNN entitled "World markets soar on US mortgage takeover." Let me tell you what I think the takeover means, and then tell you that although this really is reality, and why there is no knowing what will happen in the near-term future. As far as the future goes, let’s reverse roles at the end of the article, and how about you try telling me what's going to happen!
In SecTreas Paulson’s speech here, he claims that the US Treasury seizing FNM and FRE "protects the taxpayers" and that there is "no reason to expect taxpayer losses from this program and in fact could produce gains." Bald-faced lies. Paulson in his speech also alludes to "the public needs," a quite forbidding phrase if you really understand what that entails. Basically, the government is fearful that a FNM and FRE collapse will crumble the stock market and the world economy like a house of cards, and this fear is a very good reason to make sure you are protecting your family. As far as taxpayer losses, Paulson may be telling what he believes to be truth in nominal dollar terms, but NOT in actual purchasing power. For every purchase of mortgage-backed debt the government supports and every loss it takes, it will just print more money to keep it from a loss. This, of course, is better known as inflation, which I’ve introduced here.
The Treasury will now add about $5 trillion in bad mortgage loans to its balance sheet. This same balance sheet is overwhelmed with almost $10 trillion in funded liabilities (aka the national debt) and, per the Dallas Federal Reserve here, unbelievably close to $100 trillion in future unfunded liabilities (social security, medicaid, medicare, etc). [As an aside, I think the Federal Reserve is setting up Richard Fisher to be the messiah or white knight in case Bernanke's famous helicopter crashes.] Face it, the Treasury is insolvent. Face it, the Treasury has failed. Except for one small detail – it can convert the slips of paper in its vaults into Federal Reserve Notes and create money out of nothing. Our government then pays the Federal Reserve, a private bank setup by the 1913 Federal Reserve Act, interest for amounts to the same as waving a magic wand over a mountain of Monopoly money murmuring a Tantric phrase and declaring it legal tender, and wah-lah, we have basically created a gigantic web of debt.
The banks will now need to write off the $36 billion of FRE/FNM preferred stock. They will no longer be able to count this money as part of their reserves. Therefore, unless $36 billion is printed up by the Federal Reserve (I want to add here to save your true fury for Congress, as they are allowing the counterfeiters not only operate, but to operate on their behest). Due to our lovely fractional reserve banking system, this will suck up another $360-$500 billion in liquidity from public markets.
Next remember the whole reason that FRE/FNM stock crashed in the first place – the mortgages it holds are not worth anywhere near what the companies had claimed they were. It is impossible to gauge just how much they are truly worth, but my educated guess is anywhere from 20-80% of the original based on some recent mortgage dumps by the big investment banks like Merrill Lynch. Again, the only option left to the US Treasury is either to borrow or inflate. As no one or no government in their right mind would lend (although here is where American firepower is indeed quite useful for awhile, I call it gun-barrel dollar diplomacy with a smiley face called democracy), eventually there will be hyperinflation, which sounds quite dastardly because it is. You can read about it here.
Now, the one hope is that foreign governments will continue to lend, right? After all, the country’s trade deficit of $700 billion has so far been fed from abroad right? Well, eventually some government somewhere is going to flinch big-time and act to save its own skin. As www.lemetropolecafe.com writes, this is all really just a great big "game of chicken." Once this starts, selling of the dollar could snowball into a tsunami that may wreck the structure of the entire world financial system of fluctuating exchange rates. People everywhere may start to realize what they thought was money is actually paper. I speculate food will become scarce, trade will slow to a trickle, traveling may stop as no one will know the real price of anything.
And there is still over $1.1 quadrillion worth of derivatives, which are more or less a form of gambling, or as Warren Buffet called them in 2003 "financial weapons of mass destruction: Of course, almost all derivatives are in US dollars, which is just freaking swell.
Overall, all of this news is super, super dollar negative. So, what will happen next? Well, in a world of free (or nearly free) markets, the dollar would immediately plunge, and the above would be the likely result. However, do not delude yourself, we do not live in a world of free markets. Do not delude yourself, look for the evidence and educate yourself. We live in a fantasy world of financial interventions and manipulations, of American wars financed by China, Japan, and Saudi Arabia who in turn got their money from the American consumer in return for their goods or for their oil. How does that make any sense?
So what happens next? I do not know. A global fiat economy crisis is wholly uncharted territory. My best guess is that we will enter a period of chaos and severe market instability as the derivatives slop back and forth on gigantic scales that are hidden from the view of us simple mortals – the US Treasury takeover will also help obscure these bloodbaths from public view as the insiders who know the next step in the intervention of the market’s deathly tango will wipe out those who know a little less or guess wrong. However, the central banks and governments will definitely be aiming for stability, and to date they have done a wonderful job in keeping the population misinformed. The only question is are they heavy enough to keep this pot of boiling water from blowing its lid off? Or heat it up slowly enough so that the frogs don't even notice as they die? In the short-term, I think the central banks still have it under control, after all, they can decide what to manipulate next, so they are able to plan in advance, something you and I cannot do as we do not have their powers. Remember, this seizure was plotted 2 months in advance by Congress in HR 3221, as I wrote about here.
I know the above all sounds complicated, and it all is my conjectures based on what I have read and studied, founded on the works of Rothbard and Mises from the Austrian School of economics. Trying to figure out the central planners of our economies and money supply will do next is like trying to win a game of chess against an opponent who holds a cloth over his half of the board. However, I do know reality is really very simple.
Fiat currency is a scheme perpetrated by central banks and the tacit (or is it helpless?) permission from their governments. Fiat currency is almost completely worthless and has no intrinsic value. All of the world’s fiat money is actually a form of debt, and it results in never-ending currency debasement, of which one way is expanding the money supply, aka "printing more money," aka inflation. To make their scheme work, they intervene in the precious metal markets to manipulate the prices of silver and especially gold. By keeping the prices of real money suppressed, they try to make their fiat currency look better. So why not just buy physical gold (and I do not mean paper gold, that GLD or SLV ETF crap)? You answer that question.
Personally, I think the answer is akin to giving the central planners a roundhouse blow to their temples, upending the table on them and stuffing their mouths full of chess pieces. In a moral secular sense, is this not what Jesus did to the moneychangers at the Temple? The one time in his life he got seriously, and I mean seriously, pissed off?
As a disclaimer of sorts, I am a supporter of owning physical gold, physical silver, www.gata.org and www.goldmoney.com. Any investment or financial views expressed in the article are mine and mine alone, so make your own financial decisions by educating yourself. For the record, I wish I am wrong, but to date my wishes have failed to change anything in my life, so I’ve decided not only go with my own judgment, but to share my views to help you decide, even if its just to become aware that you do have a decision to make. Any questions, feel free to email me. [Reach the Author Here!] I recommend the below Money Matrix series as a starting point.
PS And don’t be so glum! The world's true heart is still a wonderful place, and the life in your veins will still be there to help you survive and flourish no matter what happens next. Cheer up!
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
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Posted By: Cecil Williams
Date: 2008-09-08 12:26:32
Your point is well made about fiat currencies of the world. Remember, however, that a looter government has a gun while the man in the street does not........... Obviously buying and holding secretly, physical precious metals is a short term solution for one, but alas! not a long term one.
Why is it not a long term one? In Zimbawe, where our industrialized civilization is headed ultimately, people are eating rats to survive and getting sick is a death penalty since the hospitals are lethal. Gold doesn't help since there is little for those with hoarded gold to buy.
What, then, is the solution? A philosophy change held by the man in the street. This philosophy change amongst the young will result in the debunking of the 'faith, hope, and charity' bullshit taught us by our nurturers, and that to be replaced by 'Reason, Purpose, and Self Esteem.' An influential and generalized comittment to reason based on rational self interest as taught by Ayn Rand is the only way to prevent the 'Zimbawezation of the industrialized worl.' in the coming decades.
Posted By: Jake, the champion of the constitution
Date: 2008-09-08 16:51:34
Dear Cecil Williams-
You are correct about just holding metal of course. Its just a step in the right direction.
One of my reasons for writing is to help get this turned around well before we are chewing on our belts and eating rats and bugs. I'm just trying to point out to people there is a choice of sorts between wholeheartedly supporting govt's paper fiat money and supporting honest money.
To be fair, investing about 5% of net worth or so is recommended in every conservative investor guide I've ever read- from the 1980s or earlier. After 1990s, its all dollar cost averaging and index mutual funds, no mention of gold anymore.
Just spreading my viewpoint, plenty of people won't agree, hence the Rand quote at the very beginning. Thanks for writing back!
Jake
I'd be interested in what you think about these articles
Awesome essay! Keep it up. While you and I disagree on foreign policy when it comes to war, this is right on the money. Correct me if I am wrong on this; Didn't the foreign governments pressure the government to shore up Freddie and Fannie since the alien companies own most of the bad notes? I could be way off on that somewhere. I had heard it on Beck and I think he heard it from Peter Schiff (who is da man).
A brief comment. I think the obliteration of the rights of the preferred shareholders in this takeover was a violation of the the due process clause of the 14th amendment of the Constitution. I certainl involved a taking or confiscation of their property and it was done by non elected government officials. At this point what if anything distinguishes the USA from Venezula or Russia, in principle? I am guessing that no banks or other institutional shareholders are going to challenge this takeover on because they know the courts won't listen and because there could be retaliation by the Treasury and the Fed for not playing ball.zxA
Posted By: Walt Thiessen
Date: 2008-09-09 08:45:07
ejhickey: In case you hadn't noticed, the 14th amenment (and most of the others as well) have long since been obliterated. In the case of the mortgage crisis, the obliteration took place starting with the creation of the Fed in 1913. The mortgage crisis is merely the result of that institution's long-term development.
Legally, all funds in an investment are at risk. Practically, under SEC regulations and securities law, stockholders are most at risk, preferred stockholders are next at risk, and debtholders are third in line. The banks are the debtholders. Therefore, when it comes time to assign loss, the stockholders lose first, the preferred stockholders lose second, and the banks lose third. Since the banks "can't be permitted to lose" because the government has long since decided that to have the banks lose would mean the end of civilization itself, it becomes clear where the dividing line for taking losses is bound to be drawn.
The question still remains however...will that be enough of a dividing line to end the crisis long-term? Only time will tell. Personally, I'm not "banking" on it. :-)
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