Fannie Mae and Freddie Mac: Too Fat to Fail

Government Intervention

When all is said and done, the bailout of Wall St.,the mortgage lenders and now Fannie Mae & Freddie Mac, it looks like we are emulating the Socialist countries.If that's OK, why is it impossible to have a Universal Health Care system? Too socialistic, huh? Comment? I am a professional card-carrying cynic, skeptic, curmudgeon. But you knew that, right?

A systemic flaw in the banking system

When the Federal Government delegates its sovereign authority to issue money to private corporations or banking complexes; when those entities issue money into the economy as loans, and charges interest of those loans; and when no one issues money to pay the interest on the loans -- the loan contracts, as a collective whole, are impossible to honor, and foreclosures are the result of this inherent flaw in the system.

If the Federal Government issued the nation’s money in all its form; if the banks were required to have all the money they lent out, or required to borrow it from the federal government, at interest; and if the Federal Government used its authority to spend money directly into the economy in an amount to supply the necessary interest required on loans plus an additional amount to adjust for economic growth – America would do away with the national debt, create a stable currency and a sustainable economy.

Since money represented by the national debt is already in play in the economy; since substituting money for government bonds are an equality, creating no inflation; since most of the transactions could be done with ledger entries – paying off the national debt would be simple bookkeeping, eliminating the interest payments on the debt and balancing the federal budget in the bargain.

I thought we loved markets?

The basic premise of "too big to fail" appears to show a mass-psychological denial of basic facts that are too obvious to ignore.

We have a market system that sets prices. The "too big to fail" doctrine asserts a desired outcome over market forces.

This is a total contradiction of our own ideology and will end

very badly for us. Does anyone really think that housing prices and the mortgage debt market is just going to "bounce back" over a couple of quarters? No way, this is the big one -- hyperinflaction, mass unemployment and total collapse of the dollar are nearer than we care to recognize.

Therefore, the further we go down the "too big to fail" road, the more damage we are creating for later. The least amount of damage would be to let the market pricing run its course.

Instead of "too big to fail" we should be re-structuring our market system to withstand market price fluctuations. But we are not showing enough collective cleverness and honesty to deal with this rationally.

In other words, we ignored the downside pricing risk, and now wish to be protected from its inevitable consequences. Our politicians, bankers, and economists are all leading us down a ruinous path that will end up discrediting free markets and capitalism before we are done. This is nothing short of the end of the US economic system, and could lead to civil turmoil and revolution, because the long term consequences will be so devastating for so many people.

Loss of home value?

It is called a bubble. It was begun with loose credit. Housing prices soared. Real estate brokers proclaimed that housing never declined. Nobody paid any attention to the 80 year housing appreaciation line of 1% a year. So now that the myths are broken, everyone with bad judgment wants to go after the banks. Bad judgment is bad judgment. Anybody with a meager income of 40K a year that thinks they should be living in a 400K home has a serious problem with reality as well as poor math skills. So what where they doing? Gambling pure and simple on a myth that nothing down mortgages would lead to huge profits though appreciation. I have no sympathy for the stupid. They are nothing more than fertilizer for the system, grist for the mill.

Folks in the real estate business are hoping that the gov bailout spins up another bubble. But it won't. All it will do is weaken the dollar and allow the dumb speculators thing they have reached the break even point with inflation dollars. Thus, the home that they paid $400K will eventually be worth $100K its value but with inflation, they will think it is worth $500K and so they will "feel good" and untimately justify their bad judgment. I say slit their throats and let the housing markets collapse into capitulation. In otherwords, let the markets heal themselves. Everytime Gov gets involved they screw it up. The marketplace will set the dollar value in spite of the outrageous gov spending. So their is one smart player out there and that is the marketplace.

One more poiht I want to make about economic forces is this. China and India have 4 billion working hands eager to do labor. This is not a minimal economic trend. America is either going to get effecient or it is not going to compete. Labor has a global cost and has nothing to do with the minimum wage in Ameica. Unless America can find a way to compete, their luxury lifestyle is going to come to a very unpleasant end. The more liberal policies that are installed, the higher the cost of doing business in America. By bulstering up a bubble housing market, and increasing tax to productive capacicty, the gov has set up a disasterous course for this country. The giant emerging labor forces out of Asia are robust and while this trend has seen many businesses move offshore, this trend is about to accellerate. Expensive housing increases wage price inflation and is the absolute worst thing that can happen to an economy. California is emploding. The once great economic force in electronics is coughing like an old man with pneumonia. The fund and games are coming to an end. This country, because of its inefficient use of capital, and wateful preoccupation with expensive housing, has set in a pattern that needs major market force corrections, not government intervention which will only make the real medicine more difficult to swallow, and may kill the patient in the process.

Fannie & Freddie

This is the opinion of Bob Sheridan, of Sheridan & Partners, a Chicago real estate & development company. Their site is www.sheridanpartners.com/market.php

Not All Financial Woes Are Created Equal

The failure of Indymac Bank – according to The New York Times the largest lender to fail in more than two decades – can be laid squarely at the feet of the lax (or nearly non-existent) underwriting that is part of (a big part of) the sub-prime mess. The chickens simply came home to roost.

The troubles of Fannie Mae and Freddie Mac are quite different. Freddie and Fannie underwrote loans carefully; their difficulties are a result of the unprecedented decline of home values.

In 2006, going against the conventional wisdom that single-family home prices never decline (they might stop rising for awhile, but they never decline), we predicted that single-family prices could decrease 10 to 20 percent. Painfully, that forecast turned out to be very correct – but also optimistic. We’re in a cycle now in which housing declines already are greater than at any time since the Great Depression of the 30s. And we’re not at the bottom yet.

If you don’t want to be disappointed by housing performance in the near term, disregard forecasts that the bottom is just around the corner – unless that corner is in Timbuktu. The bottom is NOT coming soon. And when it does arrive, it will not be obvious, like the bottom in the chart of the DJIA. The housing “bottom” will become apparent only in the rear-view mirror, when you realize that prices have stopped falling. Don’t expect a sharp rebound.

We will stay at the bottom for quite a while. How long that lasts will vary, as always, market-by-market.

How can they be broke?

What happened to all the money that was paid through private mortgage insurance which was required of all people who got a mortgage by all banks if 20% down is not paid, and what happened to the government mortgage insurance that the homebuyers had to pay if not the PMI? That was to guarantee and protect the banks.

Riverview Community Bank

This bank is positioned to soar in the Clark County Washington market place. No subprime loans; concentration in commercial lending; a strong market place that residential prices have declined very little, if any.

RVSB

My brother has it correct; we are excited about this, because Riverview made no sub-prime loans ; holds no sub-prime loans and the local market is quie stable. The management decision to concentrate on commercial lending is producing great reward to the stockholders. Keep it up Pat & Ron!

RVSB

This is the bank you want to be in when the president signs the new housing 'bail out" bill. Riverview Community Bank in Clark County, Washington will soar.