"Crossing the Rubicon"

Well, they did it.

The U.S. Treasury has now assumed the full liability for Fannie and Freddie's liabilities in the market. Books will be written as to how the U.S. Federal GOvernment got into the hedge fund business (after all, Freddie and Fannie are nothing more than mortgage hedge funds). This was the proverbial "rock and a hard place", especially in an election year.

Paulson has asked Congress, and it will be rubber stamped, for "authority to buy unlimited stakes in and lend to the companies", and for the Federal Reserve to assume increased regulatory oversight. "UNLIMITED"!!!! And not just guaranteeing the debt, but equity, too!! I would like to welcome the U.S. taxpayer as the new landlord of last resort.

Hank Paulson and Ben Bernake have been, and will continue to be, blindsided by the size and scope of housing's decline. The price of American homes is going to retreat to a certain level, roughly 3X, of family income. That means most of the homes in California, Florida, Metro New York, Las Vegas, Arizona, etc... are going to lose more than half of their peak value in real dollars. No power in the universe can change this, certainly not the U.S. Treasury or the Federal Reserve. Let me remind you that it was this dynamic duo that just 18 months ago said that the housing crisis was "CONTAINED".

But I digress.

The "powers that be" soiled their underwear on friday, and rightly so. This is their attempt to clean up the mess in their pants. Unfortunately, this is a temporary patch, perhaps something that gets us through the election, or perhaps not.

The ironic thing is that the American taxpayer has just been called in to bail out Saudi Arabia's sovreign wealth fund, China's Central Bank, and other sophisticated, international investors that currently hold more than half of Fannie and Freddie's debt. How is that ironic? Glad you asked.

The Federal Reserve and the U.S. Treasury are now partners in the cluster fuck that is the U.S. Housing and Mortgage market. What would happen to housing, and the U.S. Treasury's investment in Fannie and Freddie if the Federal Reserve were to hike interest rates to stave off inflation or to come to the rescue of the U.S. $? The defaults would be so high that Fannie and Freddie's mortgage losses piled onto the Government's debt might DOUBLE, or at least increase by half, the National Debt - With all of its concomitant effects on the U.S. $. The Federal Reserve has just abdicated from its role to maintain the currency and price stability in favor of the U.S. housing market and the debt holders of Fannie Mae and Freddy Mac.

By taking this action the Fed and U.S. Treasury have just ABANDONED the U.S.$ to the DUST BIN OF HISTORY.

mentatt (at) yahoo (dot) com