[loveandrage]

I have a burning question.

I've been following economics and peak oil for quite some time. Big media, whenever talking about an economic upset stomach, whether predatory lending, Bear Stearns, the real estate collapse, the flailing Macs, the threat to national banks .... They will talk about most things around these issues (of course without going into too much detail) but they speak about all of these as really big deals and very scary over the thought of them collapsing. They all elude to how terrible it would be if they failed and then they stop there. They won't say what exactly would happen if they did fail. Or why it would be so bad. It's like it would be so horrendous that it is truly unspeakable. We dare not to speak of such things. And because it is to that level of severity that we must prop them all up and keep it all going as it is. While completely avoiding the discussion all together!

Never mind that it's a core principle of capitalism to let the flawed fail so that better businesses and services evolve and so competition flourishes. So shady or poor business practices are not rewarded. Now i'm not so naive as to believe America runs on capitalism. I know this nation is one of preference and privilege. Favoritism and advantage to the rich and elite as in any good Plutocracy. Still the illusion of capitalism and democracy begs that the discussion take place, what would be so bad if these entities failed?

Someone please tell me why it would be so bad in the end? And please carry it out beyond the Republican tout, people would lose their jobs, and the economy would suffer.[b]

[vision-master]

See fate of the USSR.............

[Twilight]

If they were to be specific, facts could be brought to bear, their argument could be challenged on specific points, and very likely successfully. By being as vague as possible, there is no argument to attack. Since nebulous claims cannot be scrutinised, they never run the risk of having their justification for bailouts fail to stand up to scrutiny.

[Cashmere]

The purpose is simply to scare people into submission. There's no point in discussing the ramifications of NOT doing something when you can successfully scare compliance by simple saying, "this would be really bad - we better not do it."

More importantly, the MSM is owned entirely by a small group of individuals and corporations. They are not in the business of scaring the hell out of consumers. So they don't go into, " . . . this, if allowed to happen, would result in bread lines."

That would be just undercutting the raison de etre of the MSM.

Simple, really.

[Byron100]

I have a burning question.

I've been following economics and peak oil for quite some time. Big media, whenever talking about an economic upset stomach, whether predatory lending, Bear Stearns, the real estate collapse, the flailing Macs, the threat to national banks .... They will talk about most things around these issues (of course without going into too much detail) but they speak about all of these as really big deals and very scary over the thought of them collapsing. They all elude to how terrible it would be if they failed and then they stop there. They won't say what exactly would happen if they did fail. Or why it would be so bad. It's like it would be so horrendous that it is truly unspeakable. We dare not to speak of such things. And because it is to that level of severity that we must prop them all up and keep it all going as it is. While completely avoiding the discussion all together!

Never mind that it's a core principle of capitalism to let the flawed fail so that better businesses and services evolve and so competition flourishes. So shady or poor business practices are not rewarded. Now i'm not so naive as to believe America runs on capitalism. I know this nation is one of preference and privilege. Favoritism and advantage to the rich and elite as in any good Plutocracy. Still the illusion of capitalism and democracy begs that the discussion take place, what would be so bad if these entities failed?

Someone please tell me why it would be so bad in the end? And please carry it out beyond the Republican tout, people would lose their jobs, and the economy would suffer.[b]

You've brought up a very valid point here, and no, it wouldn't be "so bad in the end" - if they let businesses and banks fail when they're supposed to. It's just that the elite doesn't want it to end for them. It's okay for the little guy to fail, as that doesn't affect the big wheels of society, but when it comes to the big boys, oh no, "we're too big to fail". All this talk of "economic collapse" is just scare tactics, just as Cashmere mentioned. They want us to think that it's okay for them to break the basic rules of capitalism in order to protect the rest of us. Well, B.S. to that!

This is why I've always thought that the capitalist model to be a recipe for failure, Peak Oil or not, as it *always* leads to a plutocracy. With money comes power...and what do people with power do? Use it to make even more money, of course! And when all the money is concentrated in the hands of the few and mighty, guess what happens? It all falls down, as there's no possible way to sustain that kind of society.

The thing that's going to be a bit different this time is the sheer scale of the Great Fall. Better get your tub of popcorn ready and buttered, as it's going to be greatest show in human history, by far...hehe.

[vaseline2008]

I've asked a similar type of question in another topic thread, what effects would it have on our global economy if both Fannie and Freddie were to fail since so many other countries including China and India have invested so much into them? Here's some of my thoughts:

1. Would the US's AAA credit rating be reduced and what are the consequences?
2. What would happen to the value of the dollar?
3. Who would buy up all the bad debt and foreclosed properties?
4. If other countries were to take possession of the foreclosed properties, would they own XX% of the USA?
5. Could we just take it all back using Eminent domain? (I'm sure this would upset a lot of them.)

[Specop_007]

You've brought up a very valid point here, and no, it wouldn't be "so bad in the end" - if they let businesses and banks fail when they're supposed to. It's just that the elite doesn't want it to end for them. It's okay for the little guy to fail, as that doesn't affect the big wheels of society, but when it comes to the big boys, oh no, "we're too big to fail". All this talk of "economic collapse" is just scare tactics, just as Cashmere mentioned. They want us to think that it's okay for them to break the basic rules of capitalism in order to protect the rest of us. Well, B.S. to that!

"Them" who?? Most large business is not a person, but an entity. "Them" is the shareholders.....you, me, the CEO etc etc. Having these institutions fail WOULD be a real big problem, for everyone from the top down. This is not to say they shouldnt be saved however, but I hardly think your poor man finger pointing accurately paints the picture.

This is why I've always thought that the capitalist model to be a recipe for failure, Peak Oil or not, as it *always* leads to a plutocracy. With money comes power...and what do people with power do? Use it to make even more money, of course! And when all the money is concentrated in the hands of the few and mighty, guess what happens? It all falls down, as there's no possible way to sustain that kind of society.

As opposed to socialism / communism, where the power is concentrated between 1 party and the poverty is shared by alll the rest? At least in our system everyone has a roughly equal chance of crossing class lines. While having the right last name can help, having the wrong last name doesnt hurt either.

The thing that's going to be a bit different this time is the sheer scale of the Great Fall. Better get your tub of popcorn ready and buttered, as it's going to be greatest show in human history, by far...hehe.

Yes!

[Twilight]

1. Would the US's AAA credit rating be reduced and what are the consequences?
2. What would happen to the value of the dollar?
3. Who would buy up all the bad debt and foreclosed properties?
4. If other countries were to take possession of the foreclosed properties, would they own XX% of the USA?
5. Could we just take it all back using Eminent domain? (I'm sure this would upset a lot of them.)

I doubt a few banks failing would reduce the US government's credit rating. So long as it can keep taxing US citizens to meet debt service obligations, no problem. And Italy got cut to A+/AA-, no disaster. It probably wouldn't do the dollar or the cost of funding government any good, but the world would not stop spinning.

I do not see expropriation on the cards, ever. That would flash up "no respect for property law" in big neon letters and trigger capital flight as it has in every other country that has ever attempted it. The consequences of that would be far worse than slipping a few grades on the credit score. It would render it meaningless and make investing in the US a banana republic style gamble. Better play the long game and wait for the new owners to sell up or lose their shirts to vandalism and neglect.

[Iaato]

Ilargi had a nice comment on this question this morning.

"Ilargi: What do you mean, you’re surprised?

Less than a week after the GSE bail-out was announced, leaving even Congress powerless to do anything but impose a few minor amendments, the real problems at Fannie and Freddie surface. Both are so soaking underwater wet in loans on properties that are fast losing value, and even more in securities that have already lost their value, that the only way from here is down. They will never resurface.

Mere days after Paulson makes the government guarantee explicit, citing the need for Fan and Fred to keep buying mortgages, and praising their sound capitalization, Freddie Mac states that they will greatly reduce the purchase of mortgages, due to the fact that they are not at all well capitalized.

Think Paulson didn’t know that last week? That the 8-year former CEO of Goldman Sachs, and all his friends and highly-paid employees, failed to figure that out?

Bill Fleckenstein makes a lot of sense in "Feds can't fix Fannie and Freddie", but still, that title misses the main point: The Feds are NOT TRYING to fix or save them. What they ARE doing is this: they are transferring the losses, as inescapable as they are enormous, that lie in wait inside the books of the two companies, from their friends, rich investors at home and abroad, to the US taxpayer.

The Goldman crowd is playing you for a bunch of fools, and if you let them, that’s what you are."

http://theautomaticearth.blogspot.com/

[Starvid]

F&F were too big to fail. Their failure wouldn't have resulted in a further gradual weakening of the economy, but a binary break. Not financial meltdown but a systemic collapse.

[JoeW]

As opposed to socialism / communism, where the power is concentrated between 1 party and the poverty is shared by alll the rest? At least in our system everyone has a roughly equal chance of crossing class lines. While having the right last name can help, having the wrong last name doesnt hurt either.

Spoken like someone who's never suffered a job loss during a recession. In tough times, job searching comes down to the buddy system. This is why unemployment offices and "Career Services" organizations at colleges/universities no longer spend any time teaching better resume-writing techniques, and instead dedicate their seminars to how to "network". The thought process there is that knowing the right people is a lot more important than anything you could ever accomplish for an employer.

I'm not saying I prefer communism. I'm just saying that the system we have doesn't equally reward people for their efforts or their talents.

[MrBill]

There is one huge difference between a bank failure and a systemic banking failure. Especially if you rely on the goodwill of foreign investors to plug your $2 billion a day current account deficit. This is not about teasing out the minute details of how bad it could be. Or about the US' credit score slipping to Italy's level. This is about an Argentine-style collapse except 100x bigger. The global financial system has absorbed a $200 billion meltdown, but there is no precident for a $2 trillion or $20 trillion systemic collapse. Sometimes I wish the US would default on their debts. Just to shut you people up! Then we will see how the little man prospers as the global financial system comes crashing down around his ears.

July 30 (Bloomberg) -- The two main economic challenges facing the world are excess demand for commodities and an excess supply of financial services, said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund.

Writing in the Financial Times, he said rapid commodity price inflation is evidence that the global economy is still growing too fast, and if all regions try to maintain that through macroeconomic policy, the result will be still higher commodity prices and a crash not too far hence.

However, many policy makers and economic pundits say the aim should be to keep fueling demand, slavishly following U.S. monetary policy, even in regions such as the Middle East, where rapid growth is causing considerable inflationary pressure, Rogoff said. Only the European Central Bank has resisted so far and it, too, is coming under political pressure as Europe's growth rate slows, he said.

The financial crisis shouldn't be used as a rationale for expansionary macroeconomic policy, because keeping inflation in check can't be compromised indefinitely for the purpose of supporting bail-out activities, Rogoff said.

If financial firms aren't to be allowed to go out of business, it's unclear how central banks and regulators propose to bring about a shrinking of the financial industry appropriate to the drop in business related to mortgage securitization and derivatives, he said.

For many reasons, technical and political, financial market regulation will never be stringent enough in booms; that's all the more reason to be tough in busts, so that investors and company executives pay attention to risks, Rogoff said.

If badly run financial institutions can't be allowed to fail during recessions, he concluded, the question presents itself: when is it possible for them to do so?

Do you have a pension? The chances are that if you do some of that money is invested in Agency bonds. You want to stiff the world's central bankers by defaulting on those Agency bonds? Good luck trying to borrow a dime afterwards. You cannot even finance your own consumption much less pay back all the debt you owe. Do you really think in all your smugness that Fannie and Freddie can default on $5 trillion in debt covered by 80% of the mortgages in America and you will come out smelling like a rose? Stupid, stupid, arrogant Americans! Screw the banks. Screw the rich. It all sounds great. But only once you learn to pay your own way. It may happen sooner than you think. Good luck!

[cube]

...Sometimes I wish the US would default on their debts. Just to shut you people up! Then we will see how the little man prospers as the global financial system comes crashing down around his ears.

MrBill I'm at "that age" right now where:
1) I'm old enough to understand the implications
and...
2) young enough to fear it

This is not some hypothetical scenario.
THIS WILL HAPPEN IN MY LIFETIME....and I'm going to be forced to live with the fallout.
I totally agree. Wishing for the destruction of the entire system just to see rich people lose their money is stupid. The 2% rich can lose 99% of their money and always have a roof over their head and 3 meals per day. You, me, and 98% of the cannon fodder out there would be FUBAR.

[Starvid]

The two main economic challenges facing the world are excess demand for commodities and an excess supply of financial services, said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund.

Wonderful quote.

[Twilight]

Is that what is really at stake though? Sometimes I think politicians are just pushing and prodding us to believe in economic doom so we open our wallets wider and fix something that is merely embarrassing.

Was there ever a question of a full $5 trillion default? There was pressure to guarantee the lot, but the actual losses would probably have remained in the hundreds of billions - the issue was the GSEs had only tens of billions and that could have been fixed without demanding a blank cheque. Instead it looks like their funding will be open-ended and instead of protecting themselves from further contamination they will shovel more garbage in. If they were defrauded the first time, will they now be a willing party? I think if we are going to spend the rest of our lives paying for a recapitalisation of banks, we can do better than Paulson's assertion that the provision should remain unspecified.

[Tyler_JC]

It was never about a full $5T default. That would imply that half of the country got foreclosed on and the houses vanished off the face of the earth (if the houses still existed, they could be rented out to cover some of the mortgage costs).

Fannie and Freddie needed, maybe, another $50 billion to become fully solvent. The Feds could have lent them that money at 0% interest to be paid back over the course of 10 years.

The companies could have managed this without collapsing.

Instead they got an unlimited line of credit from US taxpayers that they will abuse.

[threadbear]

If they let the banks fail, the dollar is sure to follow, and that's the one thing the status quo international elites don't want. A highly volatile currency or one that's plummeting in value, is unlikely to retain reserve currency status.

The best thing to do, is to socialize the losses AND all future profits by nationalizing F and F. As it stands now, the elites are using the tax payer to bail them out, but they will retain future profits, depending on the terms of the deal, which will likely be tailored in their benefit.

[vision-master]

There is one huge difference between a bank failure and a systemic banking failure. Especially if you rely on the goodwill of foreign investors to plug your $2 billion a day current account deficit. This is not about teasing out the minute details of how bad it could be. Or about the US' credit score slipping to Italy's level. This is about an Argentine-style collapse except 100x bigger. The global financial system has absorbed a $200 billion meltdown, but there is no precident for a $2 trillion or $20 trillion systemic collapse. Sometimes I wish the US would default on their debts. Just to shut you people up! Then we will see how the little man prospers as the global financial system comes crashing down around his ears.

July 30 (Bloomberg) -- The two main economic challenges facing the world are excess demand for commodities and an excess supply of financial services, said Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund.

Writing in the Financial Times, he said rapid commodity price inflation is evidence that the global economy is still growing too fast, and if all regions try to maintain that through macroeconomic policy, the result will be still higher commodity prices and a crash not too far hence.

However, many policy makers and economic pundits say the aim should be to keep fueling demand, slavishly following U.S. monetary policy, even in regions such as the Middle East, where rapid growth is causing considerable inflationary pressure, Rogoff said. Only the European Central Bank has resisted so far and it, too, is coming under political pressure as Europe's growth rate slows, he said.

The financial crisis shouldn't be used as a rationale for expansionary macroeconomic policy, because keeping inflation in check can't be compromised indefinitely for the purpose of supporting bail-out activities, Rogoff said.

If financial firms aren't to be allowed to go out of business, it's unclear how central banks and regulators propose to bring about a shrinking of the financial industry appropriate to the drop in business related to mortgage securitization and derivatives, he said.

For many reasons, technical and political, financial market regulation will never be stringent enough in booms; that's all the more reason to be tough in busts, so that investors and company executives pay attention to risks, Rogoff said.

If badly run financial institutions can't be allowed to fail during recessions, he concluded, the question presents itself: when is it possible for them to do so?

Do you have a pension? The chances are that if you do some of that money is invested in Agency bonds. You want to stiff the world's central bankers by defaulting on those Agency bonds? Good luck trying to borrow a dime afterwards. You cannot even finance your own consumption much less pay back all the debt you owe. Do you really think in all your smugness that Fannie and Freddie can default on $5 trillion in debt covered by 80% of the mortgages in America and you will come out smelling like a rose? Stupid, stupid, arrogant Americans! Screw the banks. Screw the rich. It all sounds great. But only once you learn to pay your own way. It may happen sooner than you think. Good luck!

Bread line OR bread line minus........... The Sheeple are so STUPID!

[MrBill]

If they let the banks fail, the dollar is sure to follow, and that's the one thing the status quo international elites don't want. A highly volatile currency or one that's plummeting in value, is unlikely to retain reserve currency status.

The best thing to do, is to socialize the losses AND all future profits by nationalizing F and F. As it stands now, the elites are using the tax payer to bail them out, but they will retain future profits, depending on the terms of the deal, which will likely be tailored in their benefit.

Yes. I agree. If they are going to be bailed out by the government by converting an implicit guarantee into an explicit guarantee then they should be properly nationalized so that any future profits go back to the taxpayer to pay for the bailout in the first place.

There was $5 trillion at risk. Bankruptcy is bankruptcy. That there are assets (mortgages) that can be sold-off for their salvage value after the fact means very little if Freddie and Fannie's debts exceed their capital and they run out of liquidity. You still have to find a buyer for all those outstanding mortgages.

Merrill Lynch sold-off $30 billion of their CDS for 22-cents on the dollar, and are still on the hook if their value falls by more than $1.7 billion as a potential liability. Freddie and Fannie's mortgage book is substantially larger. And given the huge market consequences of their demise there would be even fewer Lone Stars out there with that type of liquidity willing to buy up all those assets.

As it is Freddie and Fannie are the only buyers of mortgages at the moment because no other banks have the capital or the risk appetite to take on those assets in a still falling housing market. Despite having access to the Fed window for additional liquidity.

If you want to look at it rationally there was no reason that the stock market crash in 1929 had to turn into the Great Depression, but it happened. That is the problem with financial crashes. They take on a llife of their own, and once the downward momentum starts no one can say with any certainty where they will end. And a financial tsunami wipes out everything in its path. Not just risky debt and poor lending decisions, but everything and everyone caught up in its path.

We should not be in the position in the first place. How two quasi-public institutions came to be sitting on 80-percent of the US mortgage market without greater Federal oversight, and the mirage that they were not supported by an implicit guarantee is an international joke. But once the reality of the situation became clear policy makers had to sacrafice limb to save the patient's life. Not to have done so would have started an international stampede out of US treasuries and US dollars. As unpalatable as an open cheque policy towards Freddie and Fannie might be at least it guarantees their survival. Now step two is to nationalize them and finish the job.

[Farmboy]

The F&F bailout only shifts losses from one place to another. If F&F really screwed up and the losses are in the trillions this bailout won't change the outcome...higher interest rates and a devalued dollar.