The Fannie/Freddie Nationalization: Conservatives Acting Like Socialists

Gosh, boys, we truly must be in a mess of epic proportions. Sometimes it pays to watch CNBC, even if it is only to preserve my humor at a time when we see daily exemptions from hailed free market principles for troubled financial enterprises. Only 2 hours after star investor Jim Rogers reminded viewers that the government's nationalization of Fannie Mae (FNM) and Freddie Mac (FRE) potentially doubled US public debt overnight, US Treasury Secretary Henry Paulson sat in CNBC's studio to calm investors, repeating his statements from the weekend.

You can guess the official stance: Taxpayers will be protected, the housing market will stabilize etc. Oh, and he also said, "this is not something we wanted to do." He was followed by the world's best investor and richest man, Warren Buffett, who said the Treasury's plan to inject $200 billion into the two companies was the best that could be done. Freddie Mac shares are coming from a 52-week high at $65.88 and were being quoted at $1.50/70 in pre market hours Monday.

At that point, Paulson's predecessor, John Snow, came on the air, providing viewers with a good laugh when he said congress should have done something already in 2004 and 2005. That was the time he ran the Treasury. Readers of this blog may remember that former Fed chairman Alan Greenspan had warned about looming problems of Fannie and Freddie in May 2005 and September 2005.

International stock markets rallied in what will probably soon be seen as a bear market rally as this nationalization certainly does not qualify as a solution to the world's multitude of problems. I wonder if the Dow future can hold onto this pre-market 250-point gain for the rest of the day.

Shifting corporate risk and rewards from private investors' shoulders to the big belly of government that has now been running on borrowed fuel (i.e. public debts) since 2001 is definitely not a move to curb moral hazard on management boards. Something here is fundamentally wrong: Capitalism, the frontier fighter for free markets, welcomes nationalization?!

A look into history should sober everyone up. The last time US banks were nationalized was in the great depression of the 1930s. European governments had ended up with numerous bankrupt banks after WW2 that were nationalized in order to keep a financial base for the rebuilding of the war-ravaged continent. Nationalization happened even earlier in Russia: During the communist revolution in 1917 banks were the first enterprises the Bolsheviks took control of. With that control, bundles of industrial company shares fell into the country's new rulers' hands.

As the USA has been marching on an unprecedented path of monetary expansion since 1987, throwing freshly minted Federal Reserve Notes [FRNs] on every problem that came along, this weekend's biggest nationalization in history raises fears that big government will continue on this deceivingly dangerous path that will further debase FRNs. Fed chairman Ben Bernanke, always ready to flood the world with more FRNs, said in a statement:

"I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."

What comes next? The world is aware that the big three car manufacturers are de facto bankrupt. Will they be put under conservatorship too? After all they are as vital to an economy as are ailing airlines. Will the fading expenditures of cash-strapped consumers finally lead to whole malls being run by the government as it tries to follow the inflationary rule that all debts can be written off in the long term as long as the fiat money system is accepted by the public?

The cost of the bailout of Fannie and Freddie is virtually zero to the government as it will inevitably be borne by taxpayers. Add a few million more in hush-money handshakes for Fannie and Freddie executives to the potential trillion dollar disaster, because no official wants to see the true story become public ever. Bloomberg TV reported that $1.47 trillion in GSE swaps will be unwound.

Is the US Ready for a New Deal?

Remembering last Friday's new record unemployment rate of 6.1% it appears as if the current administration has not been on a path of progress since it took office. Disregarding the official GDP figures because of the ridiculous 1.2% deflator, we can confidently put the USA on the list of countries in recession - where it meets numerous European countries where the economy appears to be falling off the cliff nowadays.

Historical comparisons shine a light on the fact that countries in a state of recession have always had the doubtful joy of growing government intervention.

What is a bit different these days is that it is conservative governments - the former free market advocates - who embark on a socialist path. And by the way, why is nationalization in the USA ideologically "good" while it is "bad" in countries like Venezuela? After all, shareholders will get nothing in both places where the state's arm has reached out.

Considering the crumbling infrastructure in the US and a withdrawal from formerly public services (community services e.g. waste, jails, roads), the worsening economic situation could lead to a new New Deal.

Concluding that this nationalization is a stopgap for the current occupiers of the White House, all these pressing issues - and two wars going bad - will be left to the next president anyway. Not exactly a friendly outlook.

Comments

[jayminho:]

i wrote the same thing at a news blog here in brazil.
perfect brilliant article.

2008 Sep 08 10:59 AM

[whtamess:]

Conservatives Acting Like Socialists...Halleluja... brother.

2008 Sep 08 01:13 PM

[gauchoty:]

Amen! I cannot understand the level of interventions of late, and mostly by Republican hypocrites. This is another major blow to the over-worked, over-taxed, shrinking middle class in the USA. Where is the return on investment to the tax-payer? What did Bear Stearns shareholders get from that deal? What new services will the public get from the new organization? Will investing be cheaper for the public now, since our money has 'secured' that deal? Who are we protecting with these deals and why? Where was the Fed during the technology downturn? Where were the golden parachutes for our scientists and engineers? I can do without banks or with banks loosing some money/value. We clearly have too many ATM machines anyway given our national savings rate! Plus I have always used credit unions that are open normal hours and don't charge a fee for walking in the door and another for walking out the door, etc. If we are going to do socialism, let's do it in such a way that the public at least gets some benefits. Now that I own part of Freddie/Fannie, I'd like a reduced mortgage rate please. Do I call Paulson and ask him for one? I'd like to see Congress spend some of our tax money at home, maybe rebuilding some infrastructure, as opposed to starting little wars all around the world that we cannot win and cannot even fund!

2008 Sep 08 01:13 PM

[venividivici:]

Great article. This market has a decidedly "Sodom and Gomorra" feel about it. Cramer has a piece out this morning explaining which banks will benefit the most by being able to offload their toxic waste into Fannie and Freddie and onto the taxpayer. And investors are boring in to get their share of the swill. Just how long can this disgusting despicable behaviour go on for?

2008 Sep 08 01:17 PM

[Nikola:]

And with McCain / Palin we will get National Socialism.

2008 Sep 08 01:32 PM

[HARM:]

"In America, the only respectable form of socialism is socialism for the rich."
--John Kenneth Galbraith

2008 Sep 08 02:29 PM

[ain't no fo...:]

The hypocrisy by the republican socialists has only just begun. They have forced this all onto the next administration... if Obama wins they will attack him mercilessly as taxes are raised to cover the catastrophic losses they have caused, and all we will hear on the republican owned media outlets is that "the tax and spend Democrats are at it again."

Instead of bailing out the guilty, we should be incarcerating the scum, corporate and political alike.

2008 Sep 09 02:53 PM

[leonid bres...:]

i knew we won the cold war and you see it our way.we took the long term view.

messrs breshnev and putin

2008 Sep 10 05:15 AM

[pearl:]

Who says that if the govt. takes over these financial loans on homes. Whose to say there won't be some clause that states the govt. has the right to enter your home and take a look see when ever they want, take your guns, give you meds ??? Hmmm..... sounds familiar to me from history class. ??

2008 Sep 12 11:11 PM