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US: financial bailout of Freddie + Fannie « Previous | |Next »
September 8, 2008

The US Government has taken control of Freddie Mac and Fannie Mae, the stricken companies that underpin America’s mortgage market, yesterday and promised to inject up to £110 billion of taxpayers’ money to keep them afloat as a result of the credit crunch. The cash infusion was one of a series of measures designed to restore order to America’s stricken financial system. Another case of the American corporate welfare style of privatizing the profits and socializing the risk.

The bailout of Fannie and Freddie is one of the severe toxic collateral damages of the biggest housing and mortgage bubble and bust in US history. It has led to a systemic banking crisis, a financial crisis, a severe credit crunch, as serious recession and the bust of Fannie and Freddie .

Henry Paulson, the US Treasury Secretary and a key orchestrator of the rescue package, emphasised that the two struggling groups represented a special case for invention because their survival was crucial to the health of the worst housing market since the Great Depression of the 1930s. This market is vital to the financial system, not only because it affects the rates charged on new US mortgages but also because banks around the world, including in Britain, have large holdings of the securities.

This must sound like socialism to Wall Street and the free market Republicans whose rhetoric is that "small government" is a virtue. Didn't the Republican convention include countless attacks on big government? Yet here we have the Republican Bush administration nationalizes a major industry! The illusions need puncturing.The Republican economists consistently dismissed the possibility that there was a housing bubble and they were enraged at the suggestion that these two corporate giants could face financial problems.

George Soros, writing in the New York Review of Books, observes that:

We are currently experiencing the bursting of a credit bubble that has involved the entire financial system and, at the same time, a rise and eventual fall in the price of oil and other commodities that have had some of the characteristics of a bubble. I believe the two phenomena are connected in what I call a super-bubble that has evolved over the last quarter of a century. The fundamental trend in the super-bubble has been the ever-increasing use of leverage—borrowing money to finance consumption and investment—and the misconception about that trend was what I call market fundamentalism, the belief that markets assure the best allocation of resources.

Market fundamnentalism is the illusion that needs puncturing since what we have the bailout of Fannie and Freddie (and Bear Sterns) is a form of privatization of profits and socialization of losses; it is socialism and corporate welfare for the rich, well connected and Wall Street.

What is more serious for the US economy is that the debt burdened consumer is on the ropes and real consumption is falling. Nor does it appear likely that the rest of the world will rescue the US from recession through buying lots of US exports since growth in Europe, Japan and Canada is slowing, and so will their imports of US goods.

| Posted by Gary Sauer-Thompson at 8:41 AM | | Comments (3)


Floyd Norris in the New York Times writes supports the above argument:

Remarkably, the country that prides itself on being the beacon of free enterprise finds itself with a financial system that needs government money to finance the most important asset most Americans will ever own. There have been bailouts before, but none that seemed more crucial than that of Fannie and Freddie. The housing boom and bust have left them virtually the only sources of large amounts of money for home loans in the country.

what Norris misses is the America spends Asia lends paradigm. China is bankrolling American debt. The US doesn’t just need US government money to support the US housing market: It needs money from foreign governments as well.

Lehman Bros, the Wall Street securities firm, seems to be on the verge of collapse. It's share price continues to fall --80% in the year--because of its toxic securities. In the past year the firm has written down more than $8 billion. However, it does not appear to have a liquidity problem, unlike Bear Stearns.

Maybe the US govt will end up owning the whole banking sector?