Last week, Congress passed a housing bill that gave the Treasury Department a blank check to inject billions of U.S. taxpayer dollars into mortgage giants Fannie Mae and Freddie Mac, snatching them from insolvency. To accommodate this blank check, Congress obligingly raised its debt ceiling by $800 billion. Ouch! That’s nearly a trillion dollars. Why was it necessary to incur this potentially crippling public debt to bail out two completely private, for-profit behemoths, which have run themselves into bankruptcy with their own risky investment schemes? Policymakers said it was essential to maintain the country’s creditworthiness with foreign lenders, which today hold about one-fifth of Fannie and Freddie securities. According to a July 21 report by Heather Timmons in The New York Times. . .
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http://www.webofdebt.com/articles/fannie_and_freddie.php
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Nice work on the reference to FDR’s transformation of Hoover’s Reconstruction Finance Corporation from strictly being a bank bailout mechanism to it being a virtual Bank of the United States directing credit to approved projects whose impact increased the wealth creating capacity of the U.S. economy and facilitated the industrial mobilization necessary to defeat the military spread of fascism in Europe. I believe a reconstitution of the Bank of the United States is critically necessary at this point, as is greater awareness of the difference between a credit system (which the U.S. Constitution intended to affect) versus a monetary system (which is the troublesome arrangement we presently have) before a complete breakdown threatens chaotic circumstances making reasonable solutions less likely.
Good article I think.. but I am a bit confused. Didnt we print money out of thin air and bought stuffs the third world ppl produced through their blood sweat and tears?
Hi Bill, we did! And we owe them an equivalent in goods and services. But we didn’t buy their land and don’t have to give them ours. I don’t mean it’s a bad thing for foreigners to buy land in the U.S., but there’s another way to fund Fannie Mae besides selling our mortgages to foreigners. Roosevelt’s Reconstruction Finance Corp did it with “national credit” and we could do that again.
Ellen,
I am the first to scream about the current state of financial malfeasance, public and private, but there is some sanity for the structure of the Fed. The interest rate mechanism on treasuries is the way that the public is supposed to be able to give its input and vote of confidence or no confidence. If we feel the government is following inflationary policy (excess money supply growth and spending), we demand higher interest for the money that we lend. It is negative feed back to the government’s behavior. Unfortunately, when the trade deficit is high, as it is now, the foreign repatriation of dollars can artificially hold down treasury yields, particularly if the foreigners have a taste for our treasuries. The result is the implication, likely false, that the citizens approve of the existing fiscal and monetary behavior.
Certainly, history is replete with examples of governments learning the political trick of printing excess money for their purposes, political and other. You know the routine, focus benefits narrowly (buy of a constituent, disperse costs broadly (inflation)—stay in power until the whole thing crumbles to dust. Your idea of letting the government print money without some sort of mediation would likely take away foreign appetite for our dollar, which is fine if we don’t want or need to import their materials and products. Also, if we won’t let them repatriate dollars, they won’t take them in exchange for their products in the first place. At this point in time, that would be tremendously inflationary. Many of these products are no longer even made in America.
On foreigners owning American mortgages, FNMA and FHMA sell their own bonds to investors. China owns bonds that FNMA and FHMA pay interest on. In happy times, this game is cash flowed with the underlying mortgage interest payments. Some privately-bundled mortgages are held by foreigners, but we have no law on foreigners owning real estate. I know a number of illegal Mexicans who live in houses they bought with non-conforming (liers) loans that might be owned by foreigners. How’s that for a twist?
Here’s my simple thought for a first treatment of a very sick patient: Americans consume fewer foreign goods and put that money in savings, savings that could buy FNMA and FHMA bonds for instance. I don’t believe that government should compel this, but private citizens and organizations should teach and encourage it. If we can get all the yups chasing Audis with the government, we can get them to not chase Audis without it.
Unlike you, I advocate a gradual unwinding of the Federal Goverment’s role in all aspects of our lives including finance. There is a clear historical line of causation that shows how most of the mess we find ourselves in is government induced, but that is a book in itself. But suffice it to say that I disagree with your assertion that New Deal policies and programs got us out of the depression, or that they led to our post-war prosperity. I think that the bill is about to come due on many of the New Deal promises, and that bill will bring the country to its knees.
Regards,
John Ralph
Hi John, thanks for writing. We obviously disagree, but I’ll have to put my discussion of the New Deal in an article, as it’s too hard to prove my case in a blog. I’m working on it. Stay tuned!