Fannie and Freddie Bailout: Opinions and Wrath
September 8, 2008 — slowsmile
So the decision has finally and predictably been made and the US government will now pay out huge sums of taxpayer’s money to take over both Freddie an Fannie.
Here are some expert opinions and comments from The Gurus regarding this buy-off :
Jim Rogers says: “I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae…. So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation…These companies were going to go bankrupt if they hadn’t stepped in to do something, and they
should’ve gone bankrupt with all of the mistakes they’ve made. What’s going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What’s going to happen three years from now when the situation’s much, much, much worse?…They’re ruining what has been one of the greatest economies in the world”
Warren Buffet has referred to Fannie and Freddie and said that the “Game is Over”. He also has said the Fannie and Freddie:“… were able to borrow without any of the normal restraints. They had a blank check from the federal government. They priced risk wrong…. They don’t have any worth“
George Soros commented that a ’solvency crisis’ was coming and went on to say: “This is a very serious financial crisis and it is the most serious financial crisis of our lifetime … It is an idle dream to think that you could have this kind of crisis without the real economy being affected”
Marc Faber said on ABC TV:”What should happen is basically that the people that were running these financial institutions are responsible and the shareholders that own the shares and the bond holders of these institutions, they should take the haircut and not the taxpayer, the simple man on the street, bailing out the rich kids on Wall Street“
Paul Volcker, ex-Fed Boss, referred to the current US financial system as:”…dysfunctional. That is a polite
way of saying it failed.” and had this to say: “This bright new system, this practice in the United States, this practice in the United Kingdom and elsewhere, has broken down..Growth in the economy in this decade will be the slowest of any decade since the Great Depression, right in the middle of all this financial innovation.”
Greenspan comments:“The Federal Reserve has been unable to find any credible purpose for the huge balance sheets built by Fannie and Freddie other than the creation of profit through the exploitation of the market-granted subsidy….The strong belief of investors in the implicit government backing of the Government Sponsored Enterprises(GSEs) does not by itself create problems of safety and soundness for the GSEs but it does create systemic risks for the U.S. financial system as the GSEs become very l
arge”
Surprising that two ex-Fed bosses - Volker and Greenspan - should also both have said that Fannie and Freddie should be broken up and left to die. It also seems that the Gurus are talking sensible economics. While all the snappy Wall Street Fund managers are of opposing opinions. On one side we have the weathered and experienced opinion of tried experts, and on the other we have the opposite opinions of the desperate, slick survivors crying “Save us…Save us, Dear God !!” — this from some very rich and now extremely relieved Wall Street Fund Managers.
But the sharks are still circling in the murky waters of financial US insolvency and their numbers now are bound to increase. I fear that they will be there for a long time to come and so the feeding frenzy will continue unabated and unrestrained by the natural, primal laws of the free markets.
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September 8, 2008 at 1:00 am
Hi there,
I looked over your blog and it looks really good. Do you ever do link exchanges on your blog roll? If you do, I’d like to exchange links with you.
Let me know if you’re interested.
Thanks..
September 8, 2008 at 2:52 am
Stacey - Thank you for your kind comments, and I would like to link with your site. I’m finding out how now…
I’ve also sent you an email.
Thanks again
September 18, 2008 at 5:03 pm
slowsmile, two of Fannie’s CEO’s are/were Obama economic advisers. I wonder what type of advice they give…
Jason Blanchards last blog post..Dude, Keep the Change
September 25, 2008 at 7:52 am
The bigwigs know the real reason for the failure and they are not about to tell. The problem is the faulty financial instruments; and to some extent the entire financial system. Banks create money with lending through the fractional reserve system. Wikipedia it, if you want an explanation. But the problem only starts there. The instruments that are created primarily for their greed are always bound to fail. This is especially true in the mortgage industry when real estate prices start dropping. The flaw is the assumption that the underlying asset always appreciates.
If the greedy banks design an instrument where someone’s payment goes up from $2000 per month to $4000 per month and it backfires, then they shouldn’t come crying for help. The credit card situation is even worse. They can triple a person’s interest for being a day late. They can do this also by claiming that a person’s credit report now shows too low a score. Well I have news for these greedy banks. You can’t squeeze blood from a stone. They are going to get left holding the bag.
The banks got away with this greed for a long time. What happened when a mortgage adjusted up and homeowners couldn’t pay, was that the bank simply put up their house for sale and never lost a dime while the average Joe got screwed. This type of event precipitated a situation where a number of people made a fortune on a poor homeowner’s dumb luck. However, with real estate pricing dropping, the whole model collapses.
The problem with the bailout is the poor sap that is now paying 10% or 12% on a mortgage and barely making it. He now has no incentive to keep paying. He is better of letting his mortgage fail so he can re-negotiate his rate.
By now you can surmise where this all leads. Our government simply has to place more stringent limits on banks’ lending rates. If someone is a greater risk, we adjust by insisting that a smaller percent of their earnings go towards loans. The rate on the highest rate mortgage loan should probably be no more than 1.5 times that on the lowest rate loan. The same thing should be done to the credit card industry. The highest rate should probably be about two times the lowest rate. Curiously enough the consumer will not be hurt as much as people think. Remember that if the consumer is getting a lower interest loan with tougher income guidelines he will still be able to afford the same house as when it is a high interest rate and laxer income guidelines.
The bitter conclusion is that the banks themselves caused the housing crisis with these instruments. If we had no mortgages with usury rates, we would not have this crisis. People stopped paying because the rates were too high. It is amazing how much we talk about free markets, but the banks are unwilling to face it when it’s not in their benefit. If they lowered those rates on the problem mortgages we would not have this crisis. The banks don’t play fair. Fair is for saps like you and me. They want the government to shore them up by buying up the bad loans. This should not be done unless the government gets to insist on the banks’ interest rates being capped. Intervention in the free market process for the banks’ benefit must be equally matched by intervention in the free market process for the consumers’ benefit.
September 25, 2008 at 10:14 pm
intheknow…Quite right, many thanks for that. I also fully understand the process and effects of fractional reserve lending - see http://slowsmile.hypocrisy.com/2008/09/10/the-ravages-of-ignored-us-debt/
…which I wrote out of sheer frustration, because I believed that very few Americans knew what was going on within The Fed.
Trouble is, the credit problem is so intimately tied in with the dollar problem. The US sells T-Bills to other countries who supposedly are buying their debt and this allows The Fed to generate money out of thin air - money which is not used to pay the debt but is instead lent out at low rates to the US banks and financial institutions for loans and credit. This inflates and debases the dollar further and the fiscal debt is allowed to grow like a cancer.
The other thing I have noticed, which very few have picked up on, is that the due process of the US government is being radically influenced by Wall Street still. In Section 8 of the Paulson Bail-Out Plan there is a simple clause which demands no challenges, no accountability, no transparency and no responsibility from any legal agency or government administration. No balances, checks or oversight - the $700 billion is to be used by The Treasury “at their discretion”.
This is unheard of and truly unconstitutional. Everyone knows that most of Paulson’s advisers are Wall Street slicks….see my blog http://slowsmile.hypocrisy.com/2008/09/24/paulsons-plan-section-8-and-the-death-of-democracy/
…for further details.
In other words, if the Paulson Plan gets thru’ Congress unchallenged then it is quite evident to me that Financial Capitalism rules America now and not Constitutional Democracy. Wall Street has won the power game…
September 26, 2008 at 2:38 pm
As one looks through history, you can tell who held the most power in each civilization by the size of their buildings. Dictators, the church, governments, pharaohs, and today? The corporation rules the roost.
Jason Blanchards last blog post..Racism and the Race
September 26, 2008 at 9:36 pm
Jason…Absolutely true if you look at the Greek, Roman and Byzantine empires - some remarkable architecture there. But perhaps your final comment - “corporations rule” - is the most significant. If the Paulson Plan passes through Congress with no changes, if it is not open to balances, checks and oversight, then Financial Capitalism(and the will of Wall Street) will have defeated Constitutional Democracy, so that America will no longer ruled by its own people - but by its money-hungry Financial Institutions.
There is a subtle war going on right now. Wonder who will win…
September 28, 2008 at 3:17 am
Political Humor….If you liked this blog - you might prefer a look at http://slowsmile.hypocrisy.com/2008/09/26/ron-paul-schools-bernanke/ - If you ignore the video and look below it, you will see the current front cover of ‘Private Eye’ magazine which is English political satire at its cruel best and all visual. I put it into the Ron Paul video piece cause I was a bit fed up with being so serious all the time.
October 1, 2008 at 3:32 pm
You know what we need in a time like this?…Ross Perot. We need Ross Perot and his great big charts and graphs. Now I know Bush has an MBA, and with a few charts and graphs, I’d like to see him explain to “Main Street” what the problem is. OK, I’d like to see Saturday Night Live do a skit of Bush explaining this. But I would like a Ross Perot explanation of this problem and a flow chart explaining how this bail out will prevent this from ever happening again…by someone. Ross, you out there? We are being rushed for a reason.
If someone, doesn’t sit down with the American People and have a business meeting, prior to trying to authorize a $700B expenditure…then this whole thing is a fraud. It would not be left up to 100 Senators being told what to do by their parties or special interest groups.
This should be handled like a referendum. When an Elementary School needs more money, the mayor can’t just sign the check. It has to go to a vote. America should have a say in this. It is their money. It is their problem. It bails out the ‘fat cats’…and who is a ‘fat cat’ every single (that is 100%) of US Senators. Who will make the final call….Us Senators! This is wrong, and it will destroy the republic.
October 1, 2008 at 10:37 pm
Bill…Ross Perot was a good guy. But I saw the speech by Dr Ron Paul in congress when they were debating the $700B bailout. His arguments were devastating against the bailout, and he was a major reason the Bill failed. But there is something much worse than the credit problems coming for America - her fiscal debt is also a mess. I put up an article by Laurence Kotlikoff - a professor of economics at Boston University. He describes in detail the fiscal measures necessary to pay baclk America’s huge fiscal debt. He refers to this as the “Menu of Pain”. See this at:
http://slowsmile.hypocrisy.com/2008/09/29/menu-of-pain/
So far, no US president has had the testicular fortitude to address this serious and ongoing fiscal problem - which could bankrupt America.