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Back again for a third time, it would seem. The following is now the latest in what I suppose can be called a series, though I haven't named it yet. Previous posts along this theme:
1) Your Economy is in Trouble When the Dollar in Your Hand Loses Value by the Day (March 13, 2008)
2) Anatomy of a Crash (July 13, 2008)
Shortly after that second post, the Feds tried to make it clear that if it came down to it, as much money would be thrown into two companies: Fannie Mae and Freddie Mac, as possible to keep them from going under. The idea was to instill confidence in the two companies which between them back more than half of the $12 trillion mortgages out there. Since then, the stock prices of both companies have fallen by 50% again on extraordinary volume. Obligatory CNBC clip time, with more after the flip:
Follow up:
There is almost no amount of economic kool-aid you can drink to counteract what is really happening out there. From the New York Times:
Anxiously awaiting a move by the Treasury Department and spurned by large investment firms, Freddie Mac and Fannie Mae find themselves unable to raise capital and with little ability to maneuver.
Treasury officials have reviewed multiple plans for intervention, according to people who have spoken to top Treasury officials. But they have not identified a set of triggers that will compel a government bailout. Nor have they indicated to Freddie Mac or Fannie Mae executives when a bailout may occur or what form it may take.
As a result, investors are telling Freddie Mac and Fannie Mae that they remain unwilling to purchase new shares in the firms.
“We’re in a Catch 22,” said an executive with one of the mortgage firms who was not authorized to speak to the media. “As long as there is uncertainty over Treasury’s plan, we can’t raise money, and as long as we can’t raise money, there’s going to be more and more speculation about Treasury’s plan.”
What should be getting asked here is "does Treasury have a plan?" While bagging on the Bush Administration has almost been made into a sport, one has to remember that the same bad decisions that were made for organizations like FEMA also occurred for the Federal Reserve, though unfortunately far too little attention was paid at the time to the hearings about now-Fed Chair Ben Bernanke and, I believe, not enough scrutiny was given.
Back to the idea of a "plan" though - is there one? Listen to what Jim Cramer said in that video - he pretty much hit the nail on the head: the government seems to have adopted an unthinkable Laissez-faire approach to the current economy: what happens is what is going to happen, the government has no control. It's the type of approach that sorts out the "true believer" capitalists from those who just enjoy profiting from the system in a "wow this makes America/the West great!" sort of way. If you look at Laissez-faire economics and see no problem you are of the former; if you think something is very wrong you are either of the latter or not that big of a believer in capitalism to begin with.
What we think is, of course, irrelevant in all of this as we are not currently in control of much of anything when it comes to what happens to these companies. What realistically can be done? Congress can't order the stocks to stop trading, or fix their share price at a certain level that gives them the necessary capital to survive. Congress can't also shield any taxpayer in this country from a part of a burden to save these companies because, after all, what exactly would the entire financial system of the West look like if suddenly six trillion dollars worth of mortgages suddenly disappeared or were scattered to an uncertain wind of vulture banks looking to scrape up whatever they could at whatever low price they could in the resulting confusion?
Translation: what happens when Mr. & Mrs. America see word that Fannie and Freddie have collapsed and say "you know, I think I don't want my money in a bank right here and now" - even though the two aren't directly connected? Crisis can spawn from fear, and Americans not knowing if their mortgage is safe/going to exist by this time next year sure would cause a hell of a lot of fear when it comes to anything doing with money.
Yu Yongding, a former adviser to China's central bank walks us down that road a lot quicker than I can:
``If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic,'' Yu said in e-mailed answers to questions yesterday. ``If it is not the end of the world, it is the end of the current international financial system.''
...
China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack.
...
``The seriousness of such failures could be beyond the stretch of people's imagination,'' said Yu, a professor at the Institute of World Economics & Politics at the Chinese Academy of Social Sciences in Beijing. He didn't explain why he held that view.
For all of those who argued (me included) that if China and the United States ever squared off that China could win the war without firing a shot: just sell all our debt at the same time, it would seem amazingly poetic if not ironic if we went ahead and kneecapped ourselves before the Chinese ever get that honor.
By the by, our boom to bust cycle has turned into a contagion that is spreading. Just ask the Brits:
The longest period of uninterrupted economic growth in British history has ended, leaving the country on the brink of recession.
Almost two decades of increasing employment, disposable income and house prices ground to a halt in June, official figures showed yesterday.
After 16 years, or 63 consecutive quarters, of continuous growth it is likely that Britain is already in recession, City analysts say. Another downgrade in a month’s time could confirm that the economy has shrunk.
The latest data, from the Office for National Statistics, showed a slump in every part of the economy as the credit crunch and the rising cost of living took their toll.
It's a continuing cycle whose root cause is still not showing any signs of improving. We're talking about Fannie Mae and Freddie Mac because of a process that got moving as a result of the easy credit from earlier this decade, and the housing bubble. Now that it has burst, people are wondering when things will get better. Markets being what they are, this will not be over until the imbalances created by the bubble are properly counteracted. On those requirements, we are no where near close to the end of this.
There is still an incredible amount of houses on the market. If not a single new house was built starting tomorrow, it would still be nearly a year, in theory, before all current houses for sale were sold.
This has caused the amount new houses being built to fall off a cliff, as one might expect. This also causes people who are employed in building houses, selling things that go into houses, and most other things involved in and around houses, to suffer and possibly lose their job. There's a whole other section of the workforce suffering.
About the only thing not going terribly wrong right now is the value of the Dollar. It has stopped falling and even rallied a bit against currencies like the Euro and the British Pound. This is a bit of a misleading indicator, however, as it is not necessarily due to the underlining strength in the American economy, but instead (as the example from the U.K. shows) it is because the rest of the world is "catching up" (or being dragged down) to us in this worldwide economic meltdown, though ultimately they may not bear the worst of it - that honor could go to us in America, among Western nations at least. If you consider the developing nations, China will take that gold - their main stock market has crashed 60% from its peak so far since it would seem that Americans and Westerners making less money won't be buying as much cheap things from China, and non-cheap things are getting too expensive to send back from China.
Now would be a great time for a strong dollar policy. This would require interest rates to be raised. They're not going to be, however, as lower interest rates tend to encourage lending between financial institutions - which has all but come to a stop compared to where things were earlier this decade. There's a serious problem, however, with keeping interest rates so far low - and it's becoming apparent in the pocket book:
This is the year-over-year change in inflation dating back to the 70's. As is obvious to anyone who buys anything, the price of everything is rising - and even though the government uses extremely cherry-picked data to come to its inflation rate, those sugar-coated numbers don't even look as sweet as they used to.
The problem of a lack of money changing hands is, for the first time perhaps ever in the modern age, not being solved by throwing more money (in the form of low interest rates) at the problem. The U.S. Federal Reserve has been reduced from steward of the U.S. economy to entity that is trying to display Atlas-like strength in keeping the pillars of this economy from crumbling under the weight of its own sheer ineptitude. The U.S. Federal Reserve has been reduced to trying to keep companies from going under.
Who's next?
Better yet, what happens when there's nothing left in the coffers to bail out who's next?
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