Monday, September 08, 2008

...Is this the end my friend?...

I tried to google the lyrics I was thinking of - " let's keep dancing... let's have a ball..." and the only song that it turned up was a little ditty about the suicide of a friend. Most depressing but, for that reason, perhaps also a propos.

Readers will know that Freddie Mac and Fannie Mae is a topic that I have been banging on about for some while now; most recently here.

From Bloomberg 11 July...
07.11.08, 11:55 AM ET

NEW YORK (Thomson Financial) - U.S. stocks fell further Friday after U.S. Treasury Secretary Henry Paulson indicated that a bailout of troubled mortgage giants Fannie Mae and Freddie Mac was not on the horizon.

A somewhat short-sighted Henry Paulson.

Oh, what a different tune today! Bloomberg again...
Sept. 7 (Bloomberg) -- The U.S. government seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies making up almost half the U.S. home-loan market.

``Our economy and our markets will not recover until the bulk of this housing correction is behind us,'' Treasury Secretary Henry Paulson, who engineered the takeover along with Federal Housing Finance Agency Director James Lockhart, said in Washington today. ``Fannie Mae and Freddie Mac are critical to turning the corner.''

Now, in times gone past, NZers used to have access to government mortgages. They were "means tested" for interest rates - the lower your income the better the rate; they were in general fixed interest rates for the full 20 year term. The mortgages were available only for a first house. Most importantly, the proceeds of the loan were strictly controlled - by the lender. But then, about 20 years back, the government of the day decided that this approach was far too socialist. The portfolio was sold off to "private interests" who in their turn made quite a good profit from the deal. Now, I could if I had the inclination, mortgage both my properties to 100% (more if I had a friendly valuer) and use the proceeds for anything from more properties to a permanent global tour. Naturally, failure to make repayments and interest obligations would result in fairly rapid foreclosure, but if the funds were safely tucked away and I was in Brazil why should I worry.

What was wrong with Freddie Mac and Fannie Mae stemmed from the "government guarantee" that accompanied the privatisation back in the late '60's early '70s. There was no risk to either borrowers or investors; the government would stump up if things went pear-shaped. Because there was no commercial risk the twins effectively became lenders of last resort for all and any hare-brained idea that a person wanted to hang from a loan on their house.

And so it is.

For a nation that promotes "capitalism" as the ultimate goal of humanity, there are a lot of things wrong.

Found those lyrics, too.

Peggy Lee -
Is that all there is, is that all there is
If that's all there is my friends, then let's keep dancing
Let's break out the booze and have a ball
If that's all there is


T. F. Stern said...

My friend, you and I see the same way on this issue.

The probligo said...

I was going to post this as an update but comment will suffice.

An interview yesterday morning on the steam radio I eat my breakfast to with an economics person from US. Amongst the verbiage, it was said that Paulson had been planning and working on this "takeover" (or "nationalisation" as he put it) for some seven weeks.

Count back, and that coincides almost exactly with the first of the Bloomberg quotations in my post.

Now I can understand exactly why the diversion was made. When you have some $5 trillion swinging on a thread you don't run around waving a knife...

And TF, I am really glad to still be your friend. Starting a sentence with "My friend..." though does bring a wry smile as it is the hook to a tv ad here for one of the televangelist programmes emanating from the US. But I can not hold that against ya.