Alice in MarketLand
If you are confused about the current crises in Financial Markets as I am, we are not alone. Like all laymen I don’t know what all the acronyms mean or if they even have a meaning. They are there to confuse us. I learned that GSEs (Government Sponsored Enterprises) are Fannie Mae and Freddie Mac. What I learned from listening to some guests on talk shows is that GSEs have a back door to the Federal Treasury and have an almost unlimited credit line. They actually spend money from the Treasury without prior appropriation by Congress or Treasury Department approval. There is something fishy about that setup.
The market is soaring, but in which direction no one knows. I can’t help but think of the old adage “the bigger they are, the harder they fallâ€. The euphoria over the government “rescue†of the money markets is somewhat amusing when one looks at the rescuer, the Federal Government, whose action over the last 15 years are the cause of the current crisis. In a nutshell, the crisis caused by excessive unsecured lending and borrowing is being rescued by more unsecured lending and borrowing managed by our government that has violated all legal accounting practices in its own budgeting. Our government is most innovative in its budgeting, in which worthless paper IOUs are called “assets†and massive spending bills are called “investmentsâ€. Does it sounds like Fannie Mae?
Does the Federal Treasury have the hundreds of billions of dollars it is promising is a big question? To manage this current crisis alone it has already spent $600 billion dollars, and by the time it is finished it will spend two or three times more than that. Secretary Paulson has promised to buy out all the “toxic debt†whose size no one knows.
But who is going to rescue the Federal Treasury? Will the Fed just print more money? Where will our government get its money which it is promising? It is a poor risk for borrowing. It already has a 9.0 trillion “toxic†debt of its own, and has big bills looming on the horizon. Now, it is about to make a commitment for another two trillion it will be shelling out over the next year or two. So who is going to pay for that? Well, take a look in the mirror. Yes, you and I. The Federal Government will not raise taxes immediately, but it will borrow against future taxes. In a $14.5 trillion economy, more than half is already mortgaged, almost 60%, and soon it will be 75% and eventually a 100%. It sounds very much like a “sub-prime†mortgage to an unemployed borrower, sold by Countrywide. Don’t worry, the government guarantees that it will pay every cent of it, if it has to tax your children and grandchildren to their graves. In the meantime we can enjoy the “good life†and pretend that we are on top of the world.
What is lacking in the management of this crisis, is accountability. No one is being called to account for the fraudulent book keeping or even for theft. The rescuer is bent on rescuing failing financial institutions and the irresponsible officers, and allow them to remain at the helm of these companies. We only get glimpses of fraud as some commentators inadvertently drop a hint or two.
The massive fraud in Fannie Mae, first uncovered in 2003 by a regulator, was never fully investigated, and Democrats, with the help of some Republicans, were successful in preventing a full scale criminal investigation and regulatory reform which might have prevented the current crisis. The CEO of Fannie Mae at the time, Franklin Raines, was forced to resign, but was rewarded with a large severance package and never had to face a criminal investigation. He is currently advising Barak Obama on how to manage the housing crisis. It reads like a script for a skit on Saturday Night Live, doesn’t it? It wasn’t until 2006 that somewhat watered down reforms were passed, but it was too late. I don’t know if Fannie Mae and Freddie Mac adopted changes mandated in that bill. Now it is in government conservatorship (bankruptcy reorganization).
Why this inertia on the part of the Congress and the Administration? To the vast majority of Democrats, social policy takes precedence over fiscal stability and national interest. Nancy Pelosi’s initial reaction to the government conservatorship of Fannie Mae, was that she would not allow dissolution of or major changes in Fannie Mae and Freddie Mac. What motivated the Republicans who sided with the Democrats? I don’t know. Fannie Mae was one of the biggest contributors to the election campaigns of Senators and Congressman. That may have been a major factor in lack of proper oversight.
If all of this is confusing, it should be. As yet, we have not been given all the facts. Transparency is the biggest threat to big government and we are not going to see it in the near future. No outsider is going to bring reform, accountability and transparency to the process. What we need is a few honest insiders to band together and reorganize not only how the government regulates the financial sector but how it conducts its own business. The takeover of “toxic debt†of our financial institutions may work in the short term, but what next? Most of the “toxic†debt, the $9 trillion national debt, is already government debt. Or is it yours and mine?
