Sunday, July 13, 2008

Fannie & Freddie

It's been a wild ride for the mortgage debt crisis and we're about to hit the craziest part. The U.S. Government is going to intervene in some way Sunday night/Monday morning. Basically, the U.S. Gov owes $9 Trillion worth of money to other people. Those are our Liabilities. If they absorb Fannie and Freddie, that will add another $5T to $6T Liabilities to the US Government. That means higher taxes, even more inflation and general economic malaise.

Yes those Liabilities come with Assets (loans made to people who should theoretically repay them) but we know some portion of those loans are bad. So the U.S. government (i.e. Taxpayers) will take a loss = Default % X $5T.

These moves are weakening the dollar, the U.S. credit worthiness which should scare the b-jesus out of our foreign creditors like China, Japan, and the Middle East. We're basically telling them that their investments in us will cost them money.

It's not a pretty picture. Let's hope this is a call to action and people start being more vigilant about big-time CEO's running their companies' for their own profit and for regulators to actually do something. It didn't have to come to this.

I would recommend reading Paul Kedrosky, my favorite finance commentator, here.