Fannie and Freddie Bailout - Blowing Bubbles

NVDL: What the hell is Fannie Mae and Freddie Mac? It's a sort've shorthand for two massive mortgage companies in the States - "federal" has been colloquialised to Freddie or Fannie, Mae and Mac are the more feel good versions for "mortgage."

A respected American writer once said that the US economy, such as it is, is based on Americans selling houses to each other. A friend of mine at Standard Bank pulled the stats on the various industries making up the US economy, and as it turns out, around 30% of the US economy is based around house selling and all the accessories that go with that.

If you factor in all the debt instruments and financial schemes operated by banks, the proportion is a lot more.

The implications are quite simple. If the US housing market continues to crash the world economy will follow suit. The Americans are digging a hole for themselves by effectively covering up the Fannie and Freddie mess through a bailout that simply shifts the debt back onto all US taxpayers.

That is like taking away a credit card from a deliquent child and giving it to a slightly better off sibling in order to sort it out. There may be an initial reprieve, but effectively its a case of musical chair bubbles.

The lesson we need to learn is that 'growth' is as mythical as perpetual motion, and the idea of unlimited growth is ridicuous. The idea of allowing firms to continue to make loans without limits (see bullets below) is yet another act of financial lunacy.

What should they do? Bankrupt companies are eseentially failures, and they should not be propped up. Propping them up allows the toxic waste they create to spread, and that is exactly what is happening. This then spreads even more insidiously through the US market until the entire structure has rotted. Some believe it already has.

•The firms will continue to make loans "without limits," at a time when mainstream banks have tightened lending standards or raised interest rates.

•They will have access to a line of credit from the Treasury, if needed.

clipped from europe.theoildrum.com The bailout of Freddie and Fannie has just been announced by Hank Paulson, with supporting words from Bernanke. What's interesting in what's proposed, as usual, is what's unsaid. This would seem to be an incredibly ambitious gambit: a nationalisation, an attempted bailout of ALL the banks, and an open-ended commitment of taxpayer money to save the financial world. But it's even worse than that: by providing an additional lending facility on top of that, the government is saying: we're putting our money (well, yours) where our mouth is - providing further liquidity to the companies and, I presume, expecting them, once the toxic waste has been cleared from their books (which can happen now that there is a floor price), to lend to the mortgage markets again. It's the usual solution of the Greenspan bubble: as soon as one bursts, we blow another one to cover it up and keep the party going a little longer.