Friday, September 19, 2008

Nationalization

To many, government is the answer to all of our woes. They must be excited about the fact that we taxpayers are now proud owners of an insurance company (80% equity at around $85B in AIG). The day before, the fed let Lehman Brothers move into bankruptcy and saw Merrill Lynch sell itself to the Bank of America.

We also own over half of the mortgages in America with our possession of Fannie Mae and Freddie Mac. We have a significant stake in investment bank Bear Stearns through its funding arrangement with JPMorgan Chase.

Today, the federal government, mainly under the direction of non-elected financiers (Paulsen and Bernanke), have requested that bad mortgages get removed from the books of the nation's financial institutions, to the tune of around $1T.

Non-elected officials are at the center of it because the bulk of Congress has left Washington, preferring to ignore the problem during the election run-up. At least Bush stayed and tried, I'll give him that.

It is not unreasonable that we taxpayers may become proud owners of one or more auto companies, namely GM and/or Ford, in the upcoming weeks.

The markets responded favorable all over the world in response to the U.S. government's plan to rescue banks from billions of dollars in bad debt.

This exuberant behavior is good but is probably short-term. There's an obvious problem with a bail-out of this size: the strength of the entity doing the bail out.

The WSJ calculated that the Fed has committed some $380 billion of its $888 billion in assets to the mortgage rescue operations. So a commitment of nearly $1T more clearly exceeds its ability to fulfill these obligations.

The financial risk of the U.S. government has increased. Tax revenues will certainly decline. T-bills are paying out nearly zero interest. It is only a matter of time before we see the U.S. government's financial risk increased. This will result in higher interest rates on the debt and an immediate increase in the federal debt.

Everything this administration and congress have done this year has been to take the country into deeper and deeper debt, from the stimulus package to the recent mortgage bailouts.

The "market" fundamentals are not sound. The bills will become due. There will be limited ability to pay and honor the commitments.

This nationalization strategy is flawed. This Marxist strategy may "work" in China, but it will not in America. Even if the underwhelming token candidate Obama wins in November and attempts his tax and spend policies (trumping Bush's version), it will take us deeper and deeper into the depths of no return.

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