The world woke up Monday to what's being billed as one of the biggest nationalisations ever: the bailout by taxpayers of US behemoths Fannie Mae and Freddie Mac. These two bloated government-created panjandrums, something like NZ's SOEs, are repositories of around fifty percent of America's "secondary" mortgage market -- of the cheap credit that 'The Fed' printed and Fannie and Freddie then doled out so would-be home-owners could make up the difference between what they wanted to pay, and what they could really afford.
Someone had to pay the bill eventually for the decade-long bubble this created. That someone is us.
The chickens represented by this middle class welfare for house-buyers have now come home firmly to roost. The delusion of inflationism -- the process by which prosperity is 'assured' by expanding the money supply while strangling production -- which allowed everyone to believe this was sustainable, has been demonstrated by this collapse (and be every previous bust) that pumping up an economy with the government's counterfeit capital never can be sustainable, but in paying for the bailout with more of the counterfeit capital that caused the problem it's clear the chickens haven't yet landed in the homes of those who most need the lesson.
It's as if they still think that the magic salve of printed money will still be able to turn stones into bread, and snatch miracles out of disaster.
This is not good sense; it's throwing good money (yours and mine) after bad.
And let's get something straight here: creating these behemoths in the first place was not an example of capitalism at work -- that was the ' New Deal.' And bailing out these behemoths now is not capitalism at work either-- it's just more middle class welfare whose bill will eventually have to be paid. But letting them fall would be capitalism at work -- a long-overdue and urgently necessary creative destruction that will do more to stabilise the situation than any amount of dollar bills dropped on the world's economy by Fed chairman Ben Bernanke and US Treasury Secretary Henry Paulson.
Or else let it be said as it was said some generations ago: "They saved the banks, but destroyed the economy."
UPDATE 1: The Financial Times summarises the 'deal':
The US government’s decision to place Fannie Mae and Freddie Mac into “conservatorship” came without a specific cause ...
The government is using a belt and braces to hold up the show ... It will recapitalise the government-sponsored enterprises by gradually buying preferred stock – a plan that will also massively dilute existing shareholders. It will lend the GSEs what they need to continue, before slowly reducing their operations from 2010. And it will buy their mortgage-backed securities directly itself. All this is bullish for credit markets. As for the future structure of the US mortgage market – that is a problem for the next guy. [In other words, it will be a drain on everybody's future productivity.]
How much might it cost taxpayers? The Treasury can inject as much as $100bn into each GSE to help support their combined $5,400bn portfolio of bonds – although it is unlikely to need to do so. It may even make a profit from the GSE mortgage-backed debt that it buys directly and then holds to maturity.
Even so, the bailout is potentially huge, although it will probably not be the US’s biggest: the cost to the taxpayer from the savings and loan crisis was $300bn in today’s money... drastically extending the role of the state cannot be what Paulson imagined he would be doing when he joined the Treasury from Goldman Sachs in 2006. But perhaps he is simply behaving like any good banker – he is expanding his balance sheet. The US government’s, after all, is pretty much the last one left in town.
UPDATE 2: "This is just socialism for the rich," says Jim Rogers. America is now more communist than China." See him here on YouTube.
UPDATE 3: Paul Walker rounds up some reactions around the economics blogs.