The Fannie/Freddie Bailout: Consequences to the U.S. Taxpayer 17 comments
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We now know that our government prefers to screw us on the weekend, while we are distracted by football games, errands, and laundry. I noticed that Paulson didn’t mention how much this would cost the American taxpayer during his speech. Two honest Americans, who have been right on this issue for the last two years, John Hussman and William Poole, have concluded that the tax bill will be $250 billion to $300 billion. Mr. Hussman’s analysis is as follows:
“A record 9.16% of U.S. mortgages were in delinquency (6.41%) or foreclosure (2.75%) as of June 30. This figure will likely be even worse in the third quarter report. With that January 2009 “sunset” provision now gone, I expect that U.S. taxpayers will be on the hook for about $250 billion in losses. Look – 9.16% of U.S. mortgages are already delinquent or in foreclosure, with the likelihood of further delinquencies and foreclosures in the coming quarters. On a $5.2 trillion book of mortgage loans between Fannie and Freddie, and a prevailing recovery rate of 50% on foreclosed properties, an overall loss of about 5% of this book, or about $250 billion, is a fairly conservative expectation.”
In an interview on Bloomberg News yesterday, William Poole had this to say:
William Poole, former president of the Federal Reserve Bank of St. Louis, said taxpayers may face a $300 billion bill to revive Fannie Mae (FNM) and Freddie Mac (FRE), the mortgage giants being taken over by the Federal government. "I would not be surprised if their total losses aggregate about 5 percent of their obligations" of about $6 trillion, Poole said today in an interview on Bloomberg Radio. "Five percent does not seem to me to be an outrageous guess."
To put $250 billion of losses in perspective, the tax bill of every household in America just increased by $2,300. You will not get a bill from the IRS because the government has chosen the immoral route of shifting this burden to your children and grandchildren. The U.S. Government has no money. It is broke. The $250 billion will be borrowed from the Chinese and Saudi Arabia, with an annual interest charge of $10 billion. This is $250 billion that will not be spent on education, infrastructure, or energy independence. It is the cost of financial recklessness of banks, greedy CEOs, and Americans who thought you could get something for nothing. Future generations will pay the price of our greed and malfeasance.
These actions by our clueless politician “leaders” will not solve anything. It will just keep this ponzi scheme going for a little while longer. Those who were tipped off of the announcement late Friday, probably made millions. Bank stocks mysteriously started to rise late on Friday. I’m sure the SEC is opening an investigation. These are the things that have not changed:
- There are 4.7 million homes for sale representing an 11.2 month supply, the highest in history.
- Home prices have fallen 16% in the last year according to the Case Shiller Index.
- Foreclosures totaled 1.2 million in the 1st 6 months of 2008, a 100% increase over the prior year, and are accelerating at the fastest pace in 3 decades.
- Based on historical home price relationships, we should expect a further 15% decline by 2010. This will result in further foreclosures.
- Option ARM and Alt A delinquencies will be accelerating in 2009 based upon their issuance.
- Unemployment is accelerating and will not peak until 2009, probably north of 7%.
- We are in a recession that is being driven by consumers with too much debt. Consumer spending reductions will hurt retailers and mall developers tremendously.
So, enjoy Monday's 300 point rally in the Dow, while it lasts. If you are having some trouble making your mortgage payment, paying that huge electric bill, or making the minimum payment on your credit card, just call Hank Paulson at 1-800-BAILOUT.
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This article has 17 comments:
What matters here is not the worst case financial loss or even the likely financial loss ($300b is as good a guess as any). It's the way it demonstrates the continuing belief that something can be had for nothing, and the clear lack of understanding that the GSEs' "public mission" contains within it the seeds of economic ruin. That mission is to make long residential real estate a crowded trade by enabling everyone desiring to purchase housing able to afford financing to do so. The closer they come to achieving that ideal, the higher prices will go, the more leverage will be in use, and the fewer potential buyers will be available when an existing owner wants or needs to sell. If one were to suppose that they perfected their purpose absolutely (everyone wishing to do so owns a house), a single layoff would bring down the entire economy in an amplifying wave of defaults and declines. Today's troubles are a testament to how close they managed to get.
That $2,300 per household will come directly out of your pocket, not in the forms of taxes, but in the form of inflation and currency devaluation. It will go directly into the pockets of the Saudis and Chinese investors who own this debt. It continues to amaze me that the same people who would riot in the streets if taxes rose 5% will contently pay 40% more for everything than they did a few years ago and not blame the politicians for that mess. They will also pay billions for interest on the national debt without complaint, but rant against welfare programs that cost a few hundred million.
Remember the accounting equation: Assets = Liabilities + Equity?
Well, in this case, the government is the asset, the foreign lenders own the liabilities, and the taxpayers own the equity.
Government = Foreign Lenders + Taxpayers
As the liabilities have increased exponentially, they now own a larger share of the asset than the equity holders. Thus, the assets of the government are being used to pursue the interests of the liability owners instead of the equity owners, just like in a bankruptcy. This perspective explains why the government shifted the burden of these failed companies (Fannie, Freddie, Bear Stearns, whoever is next...) from the foreign debt holders to the taxpayers.
Just think. If our government was solvent and we weren't utterly dependent on foreign borrowing, we could have just told these foreign debt holders tough luck. As it is, they own our government, and are the ultimate source of Mr. Poole's salary.
If we were solvent, we might also not be paying hundreds of billions in taxes just to pay interest on the debt - an expense for which we receive no benefit, aside from continued access to debt.
Laissez-faire policies screwed us in the 1920's, in the savings and loan debacle of 1985 and now for the first economic screwup of th 22d century. Regulation is setting the rules that economic players must adhere to. Checks and balances in our society keep it from going off track. Lately both Governmental and Economic Checks and Balances have been eliminated by the "True Believers" leaving the practical practitioners twisting in the wind.
So how do you like the new Casino called Wall Street. You cannot trust what anyone says anymore.
> jack
The US is increasingly becoming a paper tiger both militarily and economically.
The eagle has crash landed - www.yonip.com/main/art...