Wednesday, September 10, 2008

Painted Into A Corner

The Fannie Mae and Freddie Mac debacle is alternatively hailed as a masterful financial operation, a gun held to the head of the american taxpayer, the result of government intervention in the first place, or the advent of pure american socialism. There is something for everyone in the analyses being offered. To me the issues cut very deeply into the heart of this country's self perception and we best listen carefully to the messages.

The Government Sponsored Enterprises (GSE's) were put in place to enhance the flow of credit to targeted sectors of the economy. Housing, Agriculture and Education were the three areas originally focused on, but education was removed in 1995. In my opinion the one most forward looking for the nation was relinquished. Housing is by far the largest of the GSE's through Fannie Mae, Freddie Mac and the Twelve Federal Home Loan Banks.

In past years we have heard much of the "ownership society." With the encouragement of sloppy central bank policy it became the debt society as individuals acted rationally and borrowed, leveraged, speculated, and lied their way into what they were told time again was the American Dream. Throw in some extra institutional greed as the profits offered by securitizing the billions and billions of mortgage debt and we're ripe.

Every civilized society has concepts of ownership, but also that ownership is earned in some way, not stolen and free market forces should eliminate the "free lunch." The credit bubble that has ensued over the past decade made the lunch look free. Borrowing at 5% with 10%+ annual appreciation in value, make the gain tax free, give a tax deduction for the interest paid and welcome to America's 21st century version of tulip mania. Add a profit motive to coerce and cajol even the least credit worthy into the game, package the loan as a U.S. Government sponsored bond paying better interest rates and every yield hungry pension fund, hedgefund and sovereign wealth fund on the planet lined up at the buffet table. If you had any cajones at all you leveraged it 30:1 and cracked a bottle of Dom Perignon regularly. That is until the law of ever rising residential real estate values was repealed.

The discussion of whether the government should or should not have stepped in with what will end up being over $100 Billion in taxpayer cash is moot. They did. They had to. As the greatest debtor nation in the world, with an insatiable appetite for consumption and no national savings, we live by the willingness of others around the world to trade their savings for our investment paper. After years of at least giving the impression that Fannie Mae paper was "nearly" as good as Treasury bonds to let the institutions fail and take the sizable investments of our creditors like China, Japan, Singapore, Germany and so on fall into a worthless abyss would have taken our word as our bond right with it. When you are an addict, you need that fix.

During the recent political conventions I heard the phrase "addicted to oil," repeatedly and wondered why no one mentioned that oil is small potatoes compared to our addiction to spending beyond our national means. A trillion here, a trillion there, pretty soon it adds up to real money. Given the pervasive problems facing the financial system it is likely there are more shoes to drop and doubtful the political will to offer much more taxpayer money into the hopper.