I'm late posting this morning on the takeover of Fannie and Freddie because I spent last night and part of today writing for the Seattle Times on the ouster of Washington Mutual's chief executive. It's not a far leap from one to the other, because both bags of trouble have their genesis in the collapse of the housing bubble. In the case of Fannie and Freddie, of course, the problem became so serious that it put the entire financial system at risk.
That's right. Don't be fooled by Hank Paulson's "what this means to you" comments about how the federal takeover will make it easier for Americans to buy homes. The Bush Treasury was forced into using taxpayer money to back these two giant corporations to avoid a financial China Syndrome. And India, Japan, Britain, Saudi Arabia, the United Arab Emirates, et al. Here's the chilling line buried in Gretchen Morgenson's Sunday New York Times story:
The proposal to place both mortgage giants, which own or back $5.3 trillion in mortgages, into a government-run conservatorship also grew out of deep concern among foreign investors that the companies’ debt might not be repaid. Falling home prices, which are expected to lead to more defaults among the mortgages held or guaranteed by Fannie and Freddie, contributed to the urgency, regulators said.
Toes curled yet? This is what it means to be the world's largest debtor nation. As the duhs and ignos rush to coronate McCain and Palin, there it little understanding of this predicament.
The economist Nouriel Roubini, who in 2006 predicted the housing bust would produce the biggest financial crisis since the Great Depression, has pointed out that our debtor position today is very different from the 1990s. Back then, American dollars were repatriated as investments in private equity, especially in the tech boom. Today, our current account deficit is a result of federal borrowing, including for the Iraq war, consumption on credit card, and the housing bubble that has now turned into a smoking pile of bad debt. Roubini writes,
...the last time the US was running large twin deficits in the 1980s the main financers of these deficits were the friends and allies of the US, i.e Japan, Germany and Europe as the US external deficit was against these economies. Today instead the economic powers financing the US twin deficits are the strategic rivals of the US – China and Russia – and unstable petro-states, i.e Saudi Arabia, the Gulf States and other shaky petro-states. This system of vendor financing – with these US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.
This was the main thing the administration was trying to avoid in plunging in with Fannie and Freddie. But, hey, Vice President-elect Palin didn't even know they were private corporations.
As such, they engaged in what has become commonplace behavior for corporations -- cooking the books and keeping the true nature of their difficulties hidden from regulators which had been given a White House mandate to go easy. Now American taxpayers have an essentially open-ended liability tied to a mortgage disaster that is nowhere near over.
All this happened on the Republicans' watch. It's a good thing both presidential candidates are running against the Republicans this year -- or that's what one side wants stupid voters to believe. The other side had better snap out of its torpor or you ain't seen nothin' yet in the financial disaster department.