In the end, after the banks fail, and the tiny little FDIC premiums are swiftly blown away, the 'insured' deposits will still be backed up by the full weight of the federal government. that same government we pointed out earlier doesnt have any money of its own. But thats ok, because you-know-who will be called upon to cut the check.
Listen to Paulson to finally admit it - "The taxpayer"
Because Fannie and Freddie can borrow at a subsidized rate, they have been able to pay higher prices to originators for their mortgages than can potential competitors and to gradually but inexorably take over the market for conforming mortgages. This process has provided Fannie and Freddie with a powerful vehicle and incentive for achieving extremely rapid growth of their balance sheets. The resultant scale gives Fannie and Freddie additional advantages that potential private-sector competitors cannot overcome. Importantly, the scale itself has reinforced investors' perceptions that, in the event of a crisis involving Fannie and Freddie, policymakers would have little alternative than to have the taxpayers explicitly stand behind the GSE debt. This view is widespread in the marketplace despite the privatization of Fannie and Freddie and their control by private shareholders, because these institutions continue to have government missions, a line of credit with the Treasury, and other government benefits, which confer upon them a special status in the eyes of many investors.
The perversion here is that the rating agencies, and the financial markets overall, have interpreted the GSE status to mean that there is an implied government backing, and thus their securities have been priced accordingly, oversold, and overextended their mortgage debt creation all over the country. With mortgage defaults on a steep rise, Fannie May doesnt have the cash on hand to cover its day to day obligations. If Fannie May would default on its obligations, not only would it collapse, withdrawing several billion dollars worth of foreign capital from the US economy (379 billion in chinese funds alone) it would force the financial institutions as a whole to write down the actual dollar amount of the debts incurred as loans on homes that no longer could acheive the full value of the loans on them in a market that no longer has the financial resources to either push out the credit to purchase these homes at their default liabilities, or the market to move these houses in a severely chilled market in which everyone is dealing with the rising (inflationary) prices of everything from food to energy to fuel.
This instant loss of value in the american economy as a whole could cause a global dollar panic as both investors abroad and at home will be able to see exactly how much this credit rush has inflated the dollar in the several years since M3 was last reported. The resulting sell off of dollars will only further the amount of dollars in open circulation (by billions, if not trillions of dollars) and only expand the inflationary crisis.
The current government solution is to prop up the institution by either garanteeing aditional credit (from the Fed, who again charges interest) or by an injection of capitol to delay the inevitable crash, to cover the day to day expenses of this failing system. A few Billion dollar injection of taxpayers money might not seem like a small price to pay, but it does not solve the problem of this artificial and expanded value to debt ratio, which does not have the value to back it up. Most likely, this injection of money (in fact the Government buying shares of its own GSE) will only be later used to convince John Q Taxpayer that aditional liability aquisition at a later date is an even better idea, as Fannie May will continue to fail to meet its expectations. A later immenent failure will be presented as "Either you can let it fail and write the entire 3,000,000,000,000 dollar Mortgage debt into the National Debt, or for a few MORE billion dollars, you can give the system the money it needs to keep functioning and in fact MAKE money" Sounds like even more reasonable measures until you realize the imposibility of the system continuing to function in the face of huge inflation and the negative value the housing market holds as a whole. In fact this will just be used to Federalize the entire Mortgage Market, and in turn roll all of it into the National Debt Obligation in whole.
Each and every man woman and child in the United States would be liable for their share of over 12,000,000,000,000 dollars, or the entire GDP of the United States as a whole.
Good Enough For Government work, eh?
Scenario one: The U.S. government recognizes its severe financial mismanagement. It allows Fannie and Freddie to collapse completely and does not assume their liabilities. Mortgage investors take huge losses. Mortgage rates soar to more than 10%. Housing prices fall 75% – which makes housing affordable for millions of Americans previously priced out of the market.
In the meantime, the government cuts spending by 30% and reduces taxes radically to encourage economic growth (which, ironically, increases tax receipts, leading to a balanced budget). It restructures Social Security, moving the age of retirement to 75. And most importantly, the government gets out of health care completely, renouncing all of its Medicare obligations. Hospitals and doctors immediately drop their fees to meet the affordability requirements of a free market.
Back then, rather than let one row of this house of cards fall, we forced a slew of financial gluedrops (all funded by taking chunks out of taxpayer cards on the bottom of the stack) to hold up a system that was not stable. We will be lucky, if this time, by taking the same approach, we dont see the entire house topple, right on top of those now weakened taxpayer cards on the bottom.
The solution? stop paying the tax, stop over extending the credit, stop hanging on to an inflating currency, and invest and trade in a stable, sound money.
Don't Buy Federal Reserve Notes.
The answer, as always, is with the power, inherent to the people. If the government wont take the action necessary, with power the people have granted them, the people must withdraw that power and use themselves, solve the the problem the only way most problems ever get solved.
Pecunia, si uti Scis, Ancilla est; si Nescis, Domina