Fed Bailout marks beginning of end of Pax Americana

seahorse2 · Expert Joined: Oct 18, 2004 Posts: 1916

This soon to be bailout of Freddie and Fannie is the worst case scenario. There's nothing good about it. It marks the beginning of the end of global hegemony by the American empire - the end of Pax Americana. I once posted that the US "stimulus" package was a really bad sign, analogous to the Romans throwing bread to appease its citizens in the Colosseum, and that people should use that stimulus money to buy food - in retrospect very prescient. I now liken this U.S. bailout of Freddie and Fannie to the sacking of Rome by the barbarians, except that Washington isn't being pillaged by barbarians with axes, but by carpet baggers with computers.

Again, for those who don't know, I'm a lawyer in Arkansas dealing with foreclosures etc in my area.

A couple of years ago, I gave my definition of a worst case scenario. My definition of a worst case scenario was that the housing bust would not be confined to a builders/developers problem, but would become a banking problem. By that definition, we clearly have a worst case scenario. For example, we have witnessed the ANB and IndyMac failures.

Though people on the MSM have long suggested the worst may be over, we hear less of this "confidence" from the talking heads anymore, simply bc its not true. For example, if the worst were over, the Govt wouldn't be trying to bailout Freddie and Fannie. The worse is far from over.

In fact, the proposal to bailout F&F shows we're still early in this crisis. In this bailout of F&F, we are witnessing something feared since their creation more than 30 years ago - what happens if the US has to take them over? That risk was always viewed as a worst case scenario for our nation, so dire that no one could really contemplate the consequences, but viewed as so remote that it was deemed implausible. Unfortunately, the unthinkable is happening as we speak. The US is getting ready to take over F&F.

This isn't good news. This is the worst news possible. No one can possible fathom what that means and where it will all end. I will venture to guess that one day we will all look back and see this day as the beginning of the end of American hegemony in the world, the beginning of the end of America's superpower status, which ultimately hinges on the strength of its economy. The shock will ripple throughout the world, may even throw out a few financial tsunamis to foreign shores.

The US is desperately trying to save these two financial behemoths. Why? Because their financial demise will literally bring down the US economy, gov't, and most likely many countries of the world who have invested so much of their own treasury in these two failed institutions and likewise invested in the US economy which depends upon those behemoths continued success. In desperation, the US is trying to shore up F&F's balance sheets by artificially adding value to their stock. For example, the US now forbids naked short selling of those behemoths' stocks and, in addition, are going to have the US taxpayers buy stock in those two failing companies. Who here individually is willing to put their entire 401k into the stock of these companies? Its laughable that the US will put your life savings, your country's future, into them. Further, if the first two weren't bad enough, the US is going to give Paulson a blank check to do what he can to salvage F&F's financial problems and buy all the bad mortgages on the market. It can't work. The problem is far too big. There's not enough money. They will simply bankrupt the US. Oh, some will get rich, but not you or I, and it will do nothing to help our country or restore "the full faith and credit" of the US dollar.

In my own neck of the woods, I always knew we weren't even close to the end bc the banks here were unwilling to foreclose on any of the big developers. So, for over a year now, the banks have allowed these large unfinished developments to sit there without doing anything. The banks didn't want to acknowledge the problem. They stuck their collective heads in the sand and hoped that somehow these properties would sell.

I know the banks worry about taking on these bad mortgages. Once the loans go bad, they have to increase their reserves and it also reduces how much they can loan. As I watched ANB fail, it seemed like once the loans start collapsing, there's a point of no return where there's an unstoppable cascade of trouble that comes rushing in. I sense that in my area several other banks are getting close to that point. Within the last month, several of the banks have had to foreclose on the properties of one of the bigger developers here. I'm sure he owes well over $100 million on various properties now being foreclosed. This is a problem for some of these local banks. Keep in mind that the bailout of Freddie and Fannie will do nothing to finish out the undeveloped subdivisions I've just mentioned. That is a real problem.

It is going to get worse from here, much worse. Notice how the stock market has barely moved up in response to the "good news" of this bailout. Today, even, it went down (7-24-08 ). This bailout marks an epoch time point in history, the symbolic beginning of the end of the Pax Americana. It won't do anything for us, the American people, or for our country, it will only line the pockets of those bankers currently in Washington who are literally taking what riches are left as they prepare to take the remaining riches out of Washington and repatriate them oversees under the auspices of "globalization" which is nothing more than economic robbery, pilfering done at the highest level by men wearing suits and ties.

This bailout of Freddie and Fannie is analogous to the infamous burning of Rome by the barbarians - except this time we are being sacked by carpet baggers with computers, not ax wielding barbarians. At least the barbarians gave the Roman people an opportunity to fight back. The Roman empire survived a long time after Rome was sacked, but Rome never again attained its previous glory. In fact, the fall of Rome marked the beginning of the dark ages. Let's hope that our own "burning of Rome", the sacking of Washington by the carpet baggers led by Paulson, does not mark the return of a new dark age. We have been steered into uncharted territory, literally, towards a place so dark that no one five years ago even deemed it plausible to consider. We are a listless boat without a mainsail and worse yet, without a captain.

dsula · Heavy Crude Joined: Jun 13, 2007 Posts: 140

Hi, can you elaborate in more detail as of why you consider this F+F story a turning point. Thanks.

Cashmere · Light Sweet Crude Joined: Mar 27, 2008 Posts: 1971

Problem:

Americans are tapped out - no liquidity and deeply in debt, both personal and governmental.

Symptom - failing housing market after a bubble pop.

Symptom - failing banks/GSEs that funded housing market bubble inflation.

Attempted remedy - use "government" money to prop up failing banks and GSEs.

Why it won't work - there is no such thing as "government" money. This is a major problem in the mindset of most Americans. When they say, "let's have the government send a stimulus check", they fail to realize that the Government doesn't have any money.

"Government" money is, really, just your money in the form of taxes.

So here's the "remedy" being tried . . .

Prop up a failing banking system that is failing because people don't have enough money with money from the people who don't have enough money.

Does that sound like a good idea to anybody?

At best, what this would be is a redistribution of wealth from the solvent to the insolvent.

But that's not what it is, because the bailout is not going directly to insolvent citizens.

Instead, the bailout is going to banks and the holders of bank debt and bank equity. And the holders of bank debt and bank equity are, mostly, wealthy solvent people and foreigners.

In the big picture, what this bailout will do is prevent massive losses for the equity and debt holders who fund the GSEs and banks like Bear Stearns.

But at what cost?

The cost will be felt by everybody, and substantially by the lower socio economic tiers, because the net effect of this government nationalization of the GSEs is going to be a declining dollar and rising interest rates.

The result of that will be further degradation of the housing market and further reduction of the group able to obtain credit, because, as mortgage rates go up - and they will, mercilessly - not only will many be unable to get loans, the value of houses will continue to drop for want of able buyers.

I have to agree with SH2 that this marks a major point of inflection in U.S. history.

As bad as everything was and is, we're now beginning the process of "turning on the printing presses".

If you're unsure of what that means -

It means that the money that is going to be used to Nationalize F/F and any large banks that fail will be created out of thin air by the Treasury through the issuance of new Treasury debt - that is, by the U.S. borrowing more money.

That will result in two things - 1. The money supply increases dramatically as the Treasury issues more and more debt to pay for the bailout and 2. The interest rate on all long term debt will rise to compensate those giving the U.S. more loans for the now increased risk of default by the United States.

This is it folks. As if a failing economy and PO weren't enough to send us over a cliff, we now have idiots like Benjamin Shalom Bernanke and Henry Merritt Paulson applying full throttle to accelerate the descent.

And SH2, this is the "worst case" scenario. Smile

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Massive Human Dieoff must occur as a result of Peak Oil. Many more than half will die. It will occur everywhere, including where you live. If you fail to recognize this, then your odds of living move toward the "going to die" group.

heroineworshipper

The alternative to pimping $1 trillion for the rich is just to let that 0.1% of the population lose their home equity. No-one would feel a thing except for the whining executives on CNN.

No-one ever heard of printing so much money to fund such a small club & when it finally happened the media treated it like business as usual because the elite have become so vital to their bottom line. It's not just an elite club, it's so elite that $300 billion is only enough for 400,000 of them.
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People first, then things, then dollars.
There will be enslavement, cannibalism, & zombie invasions.

DantesPeak

I closely agree with Cashmere's post and the theme of SH2's above. However after looking closely at the F & F bailout bill, please note that this bill will not bail out F & F shareholders or even subordinated bondholders.

It will bail out other financial firms, but more importantly the foreigners who were advised, formally or informally, by Treasury Secretaries of a sub-rosa deal to back up F & F in the time of crisis. Otherwise foreigners would have never have bought F & F debt in the first place and housing boom and bust would have never happened (and I wish it never happened).

Outside of forums like this, there is a general perception that the Fed has somehow managed to avoid a deeper crisis. All it has done is kick the problem down the road just a litte bit, at great expense to the US taxapyer. Look, it only took less than 4 months for the March 17 Bear Stearns financial crisis to be followed by the early July F & F financial crisis.

Since the Fed is now giving Wall Street hundreds of billions $ in exchange for derivative collateral of uncertain value, the dollar is being debased at an alarming rate. While we may well have credit deflation, we will still have a greater, devastating monetary inflation as the Fed issues first hundreds of billions $, and then trillions $.

I don't see this ending in anything other than the loss of the dollar's 'value' (if there is such a thing) and quite probably also many other political effects.
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It's already over, now it's just a matter of adjusting.

seahorse2 · Expert Joined: Oct 18, 2004 Posts: 1916

Why is this a turning point? Because we can't afford it. For years, the US has acknowledged that it cannot pay for its entitlement programs like Social Security etc. Recently, the comptroller General resigned, five years early, bc nothing was being done about this very obvious issue.

Washington Post

With that and the wars and everything else, the US is broke. This is bailout of F&F we cannot afford. Usually, I would say this is the straw that broke the camel's back, except Freddie and Fannie are not straws, they are elephants sitting on the camel. Just look at how we have been mislead to see how serious this single issue is and what a threat it is:

Let's all look at how this bailout has evolved over the last 12 months. In short, less than 12 months ago, Paulson said the housing crisis did not pose a risk to the economy to just last week saying, if Congress didn't bailout Freddie and Fannie, it would put both the US economy and world economies at risk.

Back in 07, Paulson began presenting the bailout in little increments, all under the auspices of helping "troubled homeowners" which was nothing but political cover.

How was he going to help individual homeowners, by allowing the government backed agencies of Freddie and Fannie to refinance their homes.

bshirt · Heavy Crude Joined: Dec 23, 2006 Posts: 446

Terrific read, Seahorse2....thanks!

Cashmere · Light Sweet Crude Joined: Mar 27, 2008 Posts: 1971

DP - good followup.

The T has three options.

1. Loan money to F/F.
2. Buy stock in F/F.
3. Combination of 1 and 2.

As I understand 2, they would be buying a newly issued stock, which, obviously, would have the immediate effect of diluting current shareholders.

As I understand 1, they would simply buy debt instruments from F/F, which would have an uncertain effect on stock prices. For a standard corporation, taking on more debt would usually have the effect of lowering stock price. But here, it may raise stock price because it's a sure signal that F/F will not be allowed to fail.

But let's all be clear about this.

Without any T intervention, F/F stock go to 0 and all common equity holders are wiped out.

With T intervention, current common equity holders are not wiped out, and their stock will have some value.

Look at this chart . . .

Fannie Chart

In essence, the mere announcement of a bail out tripled the stock price.

When the T announces that it will offer a huge capital injection, that number will ratchet up even more.

So while I completely agree that common stock holders were not the targeted recipient of this bail out, they will, no doubt be enriched by it.
_________________
Massive Human Dieoff must occur as a result of Peak Oil. Many more than half will die. It will occur everywhere, including where you live. If you fail to recognize this, then your odds of living move toward the "going to die" group.

DantesPeak

Perhaps better said that the bailout will not prevent the value of F & F stock and subordinated debt from being wiped out.

The Government's 'shares', if any are ever bought, will be more like secured debt than stock.

So yes, any additional investment by the Government makes it that much harder for the companies to go bankrupt, and therefore does add some value to the stock. But is that value already priced into the stock at present? Exactly what is the value of F & F stock, being they hold $5 trillion in mortgages that are losing value and have issued more than $2 trillion in interest rate derivatives and credit default swaps?

Also the bill would loan money to F & F, allow the Fed to loan money to them, but technically does not allow them to buy debt or exchange the debts of F & F.
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It's already over, now it's just a matter of adjusting.

TreeFarmer · Heavy Crude Joined: Jun 26, 2007 Posts: 326

frankthetank

Don't want to make this political, but i had a thought last night watching "Nightline". They had Obama in Europe on, and i had an idea that maybe he is there pleading for them to prop up the dollar so he can get elected before some sort of collapse... just a thought.

Good reading above, thanks.
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"Oil is going up because we use too much oil, and the capacity to replace reserves is dwindling"
-President Bush 11/07/07

seahorse · Expert Joined: Oct 15, 2004 Posts: 2196 Location: Arkansas

This bailout is "taxation without representation" at its best, or worst, depending on whether you're a US taxpayer. The infamous Boston tea party started over less than this, and at least they had the option of not paying the excise tax on tea by not drinking the tea. Unfortunately for us, we can't avoid the consequences of Paulson writing checks that we will have to pay.

I can only hope that those who don't understand history, like Paulson and our current Congress, are doomed to repeat it. I'm going to subscribe to the local Boston papers to get a feel for what's going down there.

Cashmere · Light Sweet Crude Joined: Mar 27, 2008 Posts: 1971

Byron100

I think all of us are going to have to come to grips with the fact that America is doomed as a country. Totally and utterly doomed, as in no more USA kind of thing.

Perhaps this is some nefarious plot by the rest of the world to bring us down in order to eliminate 25% of global oil consumption, thereby delaying the onset of declining oil production. If that's indeed the case, then they're doing a mighty fine job of it!

Oh well, at least living here was fun while the going was good. I've got my 41 years of good times in, guess I can't complain too much. Cool

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seahorse · Expert Joined: Oct 15, 2004 Posts: 2196 Location: Arkansas