Does Fannie Mae and Freddie Mac’s Insolvency Spell Financial Doomsday?

by Florida's #1 Mortgage Planner on July 14, 2008

Fannie Mae and Freddie Mac's Insolvency Could Mean Financial Doomsday I was reading an interesting article from Agora Financial which is spelled out in their “Rude Awakening”.  One part caught my eye as they discussed what is currently taking place in the dual FM liquidity crisis, as presented by Dan Denning, editor of the Australian Daily Reckoning.

Dan talks about Ben Bernanke’s comments to Congress that both Fannie Mae and Freddie Mac are well capitalized and how those were the statements by Bear Stearns just before their collapse.  Citigroup was the saying the same thing just before asking for more money.  Dan hits the nail on the head with these remarks…

Why would anyone believe these investment bankers anymore when they tell the public they are well capitalised? It’s almost like the moment a CEO of a company says it’s “well capitalised” you should be prepared for a nasty shock.

But what is more interesting is what Former Fed Governor William Poole stated just yesterday,

“Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer”.

Now, I have talked about the Federal Reserve, and other parts of the government, feel it is their duty to take over the entire lending industry in what the feel is needed to protect the consumer.  As idiotic as they may be, it is well under way to happening.  In essence, the government will be transferring risk of defaults from lending institutions to every taxpayer.

Dan spells it out better than I could…

It would be the equivalent of that absurd scenario in that global warming movie a few years ago, where the Gulf Stream stops flowing and the entire Northern hemisphere enters a new ice age…in a matter of days. The insolvency of the GSEs is as close as you’re ever going to want to get to Financial Doomsday and live to tell about it.

Senators, Presidential Candidate John McCain and others have openly spoke that both Fannie Mae and Freddie Mac cannot be allowed to fail because they are vital to the American Dream of homeownership.  Of course, New York Senator Charles Schumer, who led to the demise of IndyMac Bancorp, stated that the markets should rest easy knowing the federal government will stand behind both FMs and promised quick action by Congress (spelled government takeover at taxpayer expense).

Another problem with the Federal Reserve and government in solving the issue is the impact on the dollar.  The dollar has already wasted away the wealth and sent commodity prices (oil and food) through the roof.   Since the Federal Reserve is running out of money as it is, from lending to everyone else already, new money will need to be created, further eroding everyone’s wealth and creating even more inflation. 

Of course, since inflation doesn’t exist, that won’t be a problem.  Keep in mind that the fact your monthly fuel expenses to commute to work have tripled, it’s just an illusion.  Saying there is no inflation is like an Air Traffic Controller telling a pilot that there is turbulence in a thunderstorm.

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