When I was trying out for Radio Star 4 on Saturday, I talked about if the Government should bailout home owners. (and, of course, the answer is no). I also mentioned the take over (or socialising of) Fannie Mae and Freddie Mac and how I didn’t think they should do that either. Darrell Castle, Constitution Party Vice Presidential Candidate wrote this article today, which I thought was pretty good.
Should Fannie Mae and Freddie Mac be allowed to fail? That is the question that the United States Government (USG) faces today along with the consequences of failure or the consequences of takeover which is essentially nationalization.
These two private companies guarantee $5.3 trillion of the $12 trillion US mortgage market. They are privately owned and disclaim government backing, but they are called government sponsored enterprises (GSEs). They have always been considered safe investments almost as if the USG does guarantee their safety. Since May, their common and preferred shares have each lost more than half their value which is a big problem for many banks which are heavily invested in their common shares. The decline sinks the banks’ capital base and restricts, even more, the credit once available to the American consumer. The credit market is already restricted to the point that the producing economy is grinding to a halt. This is happening because banks have restricted credit so that they will have money available to cover mortgage losses lest they be nationalized by the USG. In other words, the financial economy which has carried the American economy since the Reagan era is now destroying the consumer economy upon which our entire economic system is based. We all remember President Bush’s advice after 9-11 to “go shopping”.
The problem is that shopping is becoming impossible for most people without incurring new debt and sources of credit are drying up. The M1 figures which is all the money held in the American economy such as savings accounts, checking accounts, etc. with which American consumers can purchase without additional debt is about $1.3 trillion. This isn’t nearly enough to purchase the American production (GDP) of $13.8 trillion based on 2007 numbers. The American people fall further and further behind. Their wages are stagnant but inflation is not stagnant which constantly erodes their standard of living. They have the appearance of wealth, but it is all an illusion.
What would be the consequences of the USG’s proposed takeover of Fannie and Freddie? Will the already strapped American taxpayers have to absorb the $5.3 trillion of their debt thus almost doubling the public debt? Probably not, because not all of the Fannie and Freddie mortgages are junk. Those that are junk will have to be separated and dealt with. The common stockholders will probably take a bath but the preferred stockholders such as China with almost $400 billion and Russia with almost $100 billion can remain dirty. The companies can be run by a conservator such as that appointed in Chapter 11 bankruptcy cases to run failing companies and recover them while writing down the necessary amount of debt within classes. This Nationalization or takeover could save Fannie and Freddie and with them the entire system for a period of time, but a day of reckoning is coming and coming soon. This will add at least $10s of billions of debt to the American taxpayer each year for many years and cause even more inflation and a lower standard of living.
What would be the consequences of allowing Fannie and Freddie to fail? More than likely the consequences would involve a world wide catastrophic collapse of the international financial system. This would mean the end of our debt based economy because no foreign government would buy our debt. Foreign trade based on a trade deficit would dry up and the United States would enter a time of economic depression which would probably be worse than 1929 at least for a short time.
What then should we as a nation do in response to the decision that lies before us? The first order of business is to elect wise, honest, and ethical leaders to lead us through the crises and to make sure the American Republic as originally founded emerges on the other side. I have no doubt that Chuck Baldwin is such a leader, but I have grave doubts about Senators McCain and Obama. If we had a leader such as Chuck Baldwin, I would advise letting the system fail and dealing with the consequences. This is a chance to purge the system of debt which can never be paid, and thus remove the yoke of debt from the necks of the American people. It is a chance to return to a sound money system based on gold and silver as originally proposed. It is a chance to be free of the Federal Reserve and of the income tax. In short, we could restore our system to what it was designed to be and the American people could live in peace, prosperity, and liberty.
The collapse of the current debt pyramid system is inevitable. The USG and even the Federal Reserve cannot repeal the laws of economics no matter how much they want to. The question before us is will we choose to continue the present course which will lead to a hyperinflationary event such as what happened in Weimar Germany in 1933 and led to the rise of Hitler and WWII, or will we suffer a depression which could prove to be worse and of longer duration than the great depression of 1929. It is incumbent, therefore, upon this generation which has enjoyed the false benefits of this system for so long and which has been so profligate in its ways, to bare this hardship so that future generations, yet unborn, will not have to bare them. If we act quickly, we have the ability to control events and make our own decisions, but soon someone or some event will make the decision for us. This is the system that has been bequeathed to us.
Originally posted at http://baldwin08.com/ARTICLE-castle_on_fannie_may_freddie_mac.cfm