Fannie, Freddie and Gold
On Christmas Eve of 2009, the Treasury decided to lift the caps on how much bailout money failed mortgage giants Fannie Mae and Freddie Mac would receive to stay in business. The caps represented a maximum taxpayer exposure of $400 billion for both companies. Now, taxpayers will be on the hook for an “unlimited” amount for, at least, the next three years. How much is “unlimited?” Well, for starters, Fannie and Freddie guarantee more than $5 trillion in mortgage backed securities. Add that to the combined debt of nearly $3 trillion for both companies, and you get $8 trillion of taxpayer liability. When I first heard that the caps would be lifted for just three years, I asked myself “Why three years?” The chart below gave me the answer. Take a look at the 2010 mark. You see that wave of mortgage resets for all those different kinds of mortgages? They peak and fall off about mid 2012. 
You know the reset mess won’t be over at that precise point. It will take about six months or so for all the defaults to shake out. That’s just about three years, which is the exact same amount of time the caps on Freddie and Fannie will be lifted to bail them out of infinity. I am confident Treasury Secretary Geithner has seen the same chart. He knows those bars represent millions of mortgages. Not everybody will default because their mortgage resets, but many will not be able to afford the higher payments and lose their home.
Also, Fannie and Freddie are going to have to keep providing hundreds of billions of dollars in new mortgage financing because, if they don’t, the real estate market will probably collapse. With all the sour mortgages, securities, and new mortgage exposure, there is no telling how much this will cost the taxpayers. I don’t think it is a stretch to say it will end up being many trillions of dollars. Once again, there was a huge tax bill hung on the country, on Christmas Eve no less, and the mainstream media is nowhere to be found. Where is CBS, NBC, ABC, and CNN? What just happened to the budget deficit is bigger than the $700 billion TARP bailout, the $787 billion stimulus bill, and the $180 billion bailout of AIG, COMBINED. As a matter of fact, lifting the caps on Fannie and Freddie will cost many times more than all those COMBINED! I guess that is just not a story in mainstream media land.
On Christmas Eve 2009, an $8 trillion addition to the federal debt was made by a single bureaucrat. This move by the Treasury is a budget buster and will guarantee some very big inflation. Gold will react to higher inflation with higher prices. There was only one other time in the last 10 years that there was such a clear signal precious metals were in for a ride. It was March 2006, and brand new Fed Chief, Ben Bernanke, decided to call an end to the M3 report. (a statistic that shows the broadest measure of all money in the system). The Fed effectively said it was not going to tell the world exactly how much money it was creating. You might as well have walked into the gold trading pits with a starting pistol because, after the M3 died, gold just about doubled in less than four years. Just look at the chart below:
Now, with the elimination of the caps on mortgage giants Fannie and Freddie, you will have gold off to the races again because the government will print money to pay off debt. And if we have another financial meltdown, like 2008, gold will take a moon shot. What makes me say that? It is H.R. 4173, which is the Reform and Consumer Protection Act of 2009. This legislation is supposed to protect the little guy, but it also protects the banks with a provision in the bill to rescue them from financial ruin in the future. The Fed will have pre-authorization to give reckless banks as much as $4 trillion to, once again, bailout the incompetent. The bill has a long way to go before it is signed into law. Still, I’d say the odds are pretty good there will be another crisis; otherwise, Wall Street would not have paid their lobbyists to push a pre-authorized bailout.
My advice to you is to brace yourself for the impact of inflation. The actions of the Treasury and Wall Street have guaranteed it.
Hello Greg,
You wrote:
“It was March 2006, and brand new Fed Chief, Ben Bernanke, decided to call an end to the M3 report. (a statistic that shows the broadest measure of all money in the system).”
And to think Bernanke was appointed by that “ultra right-wing” President Bush! I have read that Bernanke is a product of academia and has no business experience. Those reports must be true.
Will Bernanke use his “trick” to halt inflation by decreasing the money supply when the economy does turn? I don’t think he’ll know when to pull the trigger; and, I don’t think the “trick” will work even if executed correctly.
Greg, you are well read and analytical, what are some scenarios for our future?
1) Will our free market engine overcome these issues?
2) Or, will we founder about and accept our lot as a 2nd world economy(10%+ unemployment for decades)?
3) Or, will we have a true “ballot box” revolution (I mean unbelievably huge upsets in 2010; 100 seats in the House and a tea party/republican sweep of Senate races)?
4) Or lastly, will we have a limited “bullet box” revolution?
thanks,
markm
Con,
Thank you for the info and the comment!
Greg
Greg – another fine one. Looks like we are way into the sh…er.
Hey, did you here that the dems are close to a deal on the healthcare debacle, and it involves higher taxes on “Cadillac” insurance plans, and that THE UNIONS WILL BE EXEMPT FROM THESE HIGHER TAXES!!!!!!!!
DID YOU HEAR ABOUT THIS?????????????????????????????????????????????????????????????????
Jill,
Thank you for your thoughtful and intelligent comment!
Greg
Greg,
Thank you for breaking down the implications of our government’s fiscal decisions so that I understand. I am not stupid; I am a licensed Healthcare professional with an advanced degree. Economics is not an area of expertise for me but this is something that concerns me. Your articles on Watchdog are allowing me to educate myself on the economy. You take a complex system and explain it so that I do not need a PhD in Economics.
My husband and I discuss the direction of our country and we do not like what the politicos are doing with our liberties, our money and least of all our country. You are saying a lot of the same things he has been saying for years.
As far as Healthcare, I am an expert. I deal with Medicare and Medicaid every day. If anyone working for a living thinks this is something they want to be on, I suggest they reconsider. Medicare and Medicaid routinely deny payment for covered services and items at an astounding rate. While Congress vilifies the insurance companies [I don’t like them either], their pets, Medicare and Medicaid; decline covered items to citizen and illegal aliens at many times the rate the insurance companies do. Yes, I did mean Illegal Aliens. Every day, I see the entitlement attitude while I work my butt off. Now, I am going to have to pay extra taxes while Obama’s Union buddies get a pass. Is that legal? Can you tax one group while giving a group identical in every way but union membership a tax break?
Now I see why my husband is doing what he is with our retirement accounts. With this Christmas gift for Freddie and Fannie, and as my husband says, Wall St.; all we can do is protect ourselves. My husband talks a lot about history and I know that he can not be the only one that reads history. I would love for you to tackle the subject of why Americans believe that they are immune to the coming storm that other countries have inflicted upon themselves due to irresponsible fiscal policies.
Elswan,
Good info! Thanks for the comment.
Greg
I increased my holdings in pm’s when I learned that the Chinese gov’t legalized and encouraged its citizens to buy and hold them. My reasoning being that they, (the gov), would not allow the pm’s to drop in value as doing so would invite unpleasant consequences. While our “gov” plays checkers they play chess. While our gov. thinks tactically they think strategically. While the dollar may go to zero, gold may go to infinity. Good luck to all of you who read this blog. I think you are on the right track.
Edward,
Good stuff! Thank you!!
Greg
Now one can understand this quote from Congressman Charles A. Lindbergh Sr., (1913) “From now on, depressions will be scientifically created.”
He was strongly against the creation of the Federal Reserve, and could foresee such things (described in this commentary) happening if it was created. Of course, he was outnumbered then by congressional fools, same as today’s Ron Paul and Dennis Kucinich.
Greg,
Who gave and / or how did “Turbo Tax” Tim Geithner get the authority and power to make a unilateral decision to guarantee Fannie and Freddie for up to 8 TRILLION? Is this not a violation of the US Constitution and usurps the authority of Congress? 8 TRILLION is twice the Obamachrist’s budget for 2010 totals which totals $3.55 trillion. I wonder if Tim Geithner has lined up a job at Goldman after he resigns.
Bye the way, have you seen the title on the 2010 budget? It made me roll on the floor laughing for about 15 minutes. A New Era of Responsibility: Renewing America’s Promise. What promise what that be? Take every dime from those that work and give to Geithner’s, Pelosi’s, Reid’s and Obama’s buddies in the Unions and on Wall Street?
They must have a comedy writer on the Whitehouse staff that came up with the title. America’s true promise is Life, Liberty and the pursuit of happiness [when the Constitution was written, this meant acquisition of property]. America promises equity of opportunity, not equality of outcome. That appears to be everything Obama abhors and stands against. If I work hard and save, why should I have more than someone that does not?
I ask myself what we could do to get out of this financial mess. This Fannie and Freddie move shows that they see it as a lost cause and they are going to steal from the American people so the politicians’ buddies on WALL STREET can stay wealthy. All I can come up with is to try to position my assets so I do not loss them when Obama’s next wealth redistribution strategy kicks in. I predict in the next two years, Obama will seize ALL 401-Ks, IRAs and Savings Accounts. SOME SUCKER has to BUY the TREASURIES. GUESS WHAT? It’s going to be you.
Disclaimer: Blame me for this mess. I voted for Obama. I voted for change. I could not make myself vote for McCain. I wished for change. What’s that old saying? “Be careful what you wish for, you may get it.” I was sucked in. I thought he meant what he said; a man of his word. OK, I admit it; I had an air bubble pass thru my brain. Why would I believe that he was telling the truth? Come 2010 and 2012, I vow to vote against every Democrat that I is on my ticket and give money to anyone opposing Reid, Pelosi, Obama and company. I KNOW the Repubs are no different but may they can derail healthcare and the looting of the middle class.
George,
Thank you for bringing up the “legal” issue. I did not have time in my post to cover it but the legality of the Treasury’s action is a big question.
Greg
Mark,
Thanks for the ideas…all are good! Thanks for the comment too!
Greg
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