Paulson is asking Congress to approve a bill on Wednesday that would allow the Treasury Department to guarantee as much as $25 billion in loans held by Fannie Mae and Freddie Mac. The two agencies themselves hold or guarantee more than $5 trillion, or half, of the nation's mortgages. Wall Street's fears that these loans will default have caused Fannie's and Freddie's shares to tumble, making it more difficult for the private companies to raise additional capital themselves. (Source: AP, Paulson braces public for months of tough times, July 21, 2008; AFP, US Treasury rescue of Freddie, Fannie at $25 Billion, July 22, 2008)
Paulson reassured talk show listeners that the banking system is solid, even though other banks might fail like IndyMac did last week. However, the FDIC system is designed to guarantee deposits up to $100,000 per bank per individual. At the same time, he warned that the economy may go through months of challenging times.
He admitted, "The three big issues we're facing right now are, first, the housing correction which is at the heart of the slowdown; secondly, turmoil of the capital markets; and thirdly, the high oil prices, which are going to prolong the slowdown." However, he added "...our economy has got very strong long-term fundamentals, solid fundamentals. And you know, your policy-makers here, regulators, we're being very vigilant."
What It Means to You
The entire financial system is built on trust. That trust was shaken by the Subprime Mortgage Crisis. The Federal government is stepping in to restore that trust by promising to bail out bad loans.This happened during the Savings and Loan Crisis, which cost the taxpayers $124 billion. This new bailout will probably cost taxpayers more, adding to the $9 trillion national debt. This is a chronic situation that will continue to depress the dollar and raise the price of imports.
Comments
If one wants to truly understand the US economy one needs to understand that the Federal Reserve is a private corporation run by bankers for profit.
Many think that the fed is a government institution. It is not. It is a private corporation owned by bankers and run for profit.
You can watch a movie called Money as Debt on youtube about the federal reserve or watch The Federal Reserve Zeitgeist. Each of these movies explains where and how money is put into our economy.
The great depression as this recession are both planned events.
If we bail out the banks we are just enslaving the American people in more debt. As every dollar the fed creates they create debt on top of it that the American people need to pay back. How do we pay off the debt? the fed creates more money and each dollar they create they put debt on top of it.
Learn and teach others about the Federal Reserve.
Hi Nina,
I’ve heard this statement many times, and my question is always…why would Central Bankers want to intentionally cause a depression or recession? Secondly, I don’t think anyone is smart enough to manipulate the economy skillfully enough to profit from a deliberate recession, let alone a depression.
I’d love to hear more about your reasoning.
Kimberly
First difficulty I have is the misconception that Fannie and Freddie are regular corporations. They are a creation of the US Congress that subsequently ended up somewhere between a true corporation and a government managed entity.
The basis for bail out is really simple logic:
- If any giant financial institution collapses (not just GSE’s but other large banks of S&L’s), today, it will catastrophically pull other markets down.
- To keep the liquidity in these GSE’s proportional (same leverage) to its debt, these corporations have to raise money and lots of it. Capital is also required to continue conducting new business. Remember, the housing has slowed down but not shut down – there are people buying and selling homes.
- The market won’t allow these GSE’s to raise money since it is spooked. The pendulum has swung all the way to the other side on the credit freeze.
- Without capital, the GSE’s cannot conduct day-in day-out business.
- GSE’s will fold. If they do, they have to pass on several trillion dollars of debt they carry of the balance sheet to some one. That money doesn’t vanish as it is backing our mortgages.
Truly, the words “bail out” do a poor job of representing the situation while it is well liked by the media since it draws attention. The Fed opening the lending window didn’t really do anything to Freddie or Fannie since they never borrowed any significant amounts. But it did stabilize the financial “markets” and the expectation was that the credit freeze would start to moderate.
This new “bail out” is an artificial phenomenon as well. If the investors did not freeze up the “market” for further capitalization by these GSE’s through negative sentiments, they could borrow money from the market. Thus the “market” has closed any opportunity to go to “market” since the “market” does not have confidence in these entities. The underlying question the “market” has is “what are the assets really worth”.
No one knows not even the institutions in this business like Goldman Sachs stated “we were totally wrong” in the assessment of the stability in the financial market – amazingly their core competency is finance.
But none-the-less they have an opinion and lack of correct information doesn’t keep them from making poor recommendations. The “market” accepts these poor recommendations and punishes stocks which then makes it impossible for these corporations to raise money. Which they makes liquidity a big problem and then the cycle starts again with another poor recommendation.
GSE’s will survive, but Lehman Brothers is done. It will come undone by poor assessments by their own peers.
Hi Ajay,
That is a good analysis of the situation. If the banks would just go back to basic lending practices, and make loans to people with good credit like they used to, the economy would bounce back much faster and the government wouldn’t have to keep “bailing out” the GSE’s.
As you said, it is not really a bail out, more a guarantee which means a bail out won’t be needed.
Kimberly
I haven’t blogged in a while but my prediction from August came true in September about Lehman Brothers.
Hi Ajay,
Do you have any other predictions that you’d like to share with us?
Kimberly