A Brave New World?

Under these agreements, Treasury will ensure that each company maintains a positive net worth.

- Statement by Treasury Secretary Paulson on the bailout of Fannie Mae and Freddie Mac

If anybody thought we had a pure free market system, they should think again.

- Robert Bruner, Dean of The Darden School of Business at The University of Virginia

Things fall apart; the centre cannot hold.

- WB Yeats, “The Second Coming”

The federal government bailout of Fannie Mae (FNM) and Freddie Mac (FRE) marks the culmination of two months of speculation and concern over the GSEs and the systemic risk they posed to the global financial system.

More broadly, it is a significant event in financial and economic history.  Analysts and historians will debate it for years, and books will be written on the subject.

The Treasury, acting in conjunction with the Fed, finally concluded what some have held for years: Fannie and Freddie are bankrupt.  That is, the mortgages and mortgage-backed securities they own are not worth as much as the debt they owe and the guarantees they’ve made.

This is no small matter.  Fannie and Freddie have $1.6 billion in debt held by central banks, financial institutions and investors the world over.  They own or guarantee $5 trillion worth of mortgages and mortgage backed securities.  Their insolvency would result in massive losses across the globe and probably a worldwide financial crash.

According to a front-page Wall Street Journal article on Monday morning, Morgan Stanley analysts told Treasury officials on the morning of August 18 that the two companies were as much as $50 billion in the hole.  It will probably amount to much more than that by the time it’s all said and done.

The government faced a choice between a massive amount of pain and an embarrassing and expensive bailout.  It wasn’t hard to foresee which one they would choose.

I’m still trying to wrap my mind around the enormity of this event.  All day I couldn’t help but thinking: “I can’t believe this is happening.  I can’t believe this is happening.”

Many years ago, a friend of mine with a Master’s Degree in Economics described the structure of the global economic system as “surreal” - with an eye towards just this type of apocalyptic event.

 *****

There’s always soma to calm your anger, to reconcile you to your enemies, to make you patient and long-suffering. In the past you could only accomplish these things by making a great effort and after years of hard moral training. Now, you swallow two or three half-gramme tablets, and there you are. Anybody can be virtuous now. You can carry at least half your morality about in a bottle. Christianity without tears-that’s what soma is.

- Aldous Huxley, Brave New World

The financial equivalent of soma is paper money.  Is the housing market collapsing?  Just lower interest rates to stimulate economic activity.  Is the economy heading towards a recession?  Send out stimulus checks to get people to spend.  Are huge financial institutions going under?  Just take them over and pay for it by printing more money.

Those who desire clarity and understanding might wonder about the long-term side effects.  Where does all this money come from?  Is there really such a thing as a free lunch?

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

- John Maynard Keynes, The Economic Consequences of the Peace, Ch. 6

Judgment day is that much closer after yesterday.  It’s not one man in a million.  Can you hear me Ludwig von Mises?  Can you hear me?

Comments

[Mumma:]

We apathetic Americans have let these conspiratorial folks (Paulson, Bernanke, Goldman Sachs, et al, ad nausea) systematically dismantle our financial system and economy. Let’s quit looking at them as if they were looking after the country’s best interests because they are not, and never were. Change! We are indeed going to get change. (Remember why John F. Kennedy was killed! He wanted to get rid of the Federal Reserve Bank).

2008 Sep 09 10:54 AM

[PacificGate...:]

WHO'S BAILING WHO?

OMINOUS SIGN BEHIND PAULSON’S ACTIONS



And as usual the taxpayer is on the hook in the biggest bailout ever, and forever after that.

2008 Sep 09 02:23 PM

[notsosmart:]

the whole thing is corrupt.liars,crooks,t... & scammers are running the show.ceo's are paid millions for ruining co's.there is no accountability.a society with these kind of people in charge,producing practically nothing of value cant survive.we gloated when russian communism collapsed.we are not far behind & putin & crowd must be laughing.what a great country we were when we made things.now we print money & shuffle valueless paper.sad.

2008 Sep 10 09:21 AM

[nukldrager:]

(Remember why John F. Kennedy was killed! He wanted to get rid of the Federal Reserve Bank)... ref?

2008 Sep 10 10:58 AM

[carey_jim:]

"If anybody thought we had a pure free market system, they" weren't thinking at all, not to say even observing economic reality, so, as non-thinkers and non-observers, they will never be ABLE "to think again."

We live (and have lived for a very long time) in a monopoly socialist plutocracy (alongside our healthy but smallish REAL free market) with excellent upward mobility through the monopoly bureaucracies, as long as would be participants don't think, observe or cultivate anything that resembles economic thought or even morality, outside of church that is. Swimming with the sharks

It is sobering to think that virtually all economists in the Soviet Union were quote Marxists and almost none followed the ideas of the great economists of the past such as Adam Smith, Leon Walras, John Maynard Keynes, Bohm-Bawerk, Carl Menger, Ludwig von Mises, Friedrich Hayek, Joan Robinson, Paul Samuelson, Milton Friedman or Robert Mundell, not to mention many other famous economists.

It's even more sobering to think that almost none of our financial pundits follow their ideas either.

"You can chase the devil out the front door with a pitchfork but he will climb back in through the window." Ralph Waldo Emerson.

Substitute "laws of economics" for "devil."

2008 Sep 10 06:43 PM