Take a Load Off Fanny

Ellen Brown writes: Fannie Mae and Freddie Mac own or guarantee nearly half the $12 trillion U.S. mortgage market. Not long ago, they were the darlings of Wall Street, ranking next to U.S. bonds as among the safest and most conservative investments in the world. They are called “government-sponsored enterprises” (GSEs), although they are entirely privately owned and specifically disclaim government backing on their prospectuses. The market has taken these disclaimers with a wink and a nod and has assumed that the GSEs are “too big to fail,” forcing the government to save them from their reckless investment schemes. Fannie and Freddie’s preferred shares have been considered so safe that banking regulators let banks count them in the capital required as a cushion against loan losses. This is now proving to be a serious problem, because both the common and preferred shares of the distressed duo are suddenly plunging. ... In July, Treasury Secretary Hank Paulson sought and was granted the authority to extend an unlimited credit line to the GSEs, which now have liabilities totaling about $5 trillion; and to capitalize them by buying their stock, effectively nationalizing them. ... "[N]ationalisation . . . would bring the whole of Fannie’s and Freddie’s debt onto the federal government’s balance sheet. In terms of book-keeping this would almost double the public debt." ... It sounds pretty grim, but let’s think about that.  Would the end of the current financial system really be so bad?  The international financial system is now controlled by a network of private central banks that print national currencies and trade them with sovereign governments for government bonds (or debt).  The bonds then become the basis for creating many times their value in loans by commercial banks.  At a 10% reserve requirement, banks are allowed to fan $1 worth of reserves into $10 in loans, effectively delivering the power to create money into private hands.  The price exacted by this private money-creating machine is compound interest perpetually drawn off the top, in a Ponzi scheme that has now reached its mathematical limits.  The chief role of Fannie and Freddie has been to keep the Ponzi scheme alive by adding “liquidity” to markets, something they do by buying mortgages and bundling them together as securities that are then sold to investors.  Old loans are moved off the banks’ books, making room for new loans, further expanding the money supply and driving up home prices. As economist Michael Hudson noted in Counterpunch in July: “Altruistic political talk aside, the reason why the finance, insurance and real estate (FIRE) sectors have lobbied so hard for Fannie and Freddie is that their financial function has been to make housing increasingly unaffordable. They have inflated asset prices with credit that has indebted homeowners to a degree unprecedented in history. This is why the real estate bubble has burst, after all. Yet Congress now acts as if the only way to resolve the debt problem is to create yet more debt, to inflate real estate prices all the more by arranging yet more credit to bid up the prices that homebuyers must pay. “. . . The economy has reached its debt limit and is entering its insolvency phase.  We are not in a cycle but the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored . . . . The class war is back in business, with a vengeance. Instead of it being the familiar old class war between industrial employers and their work force, this one reverts to the old pre-industrial class war of creditors versus debtors. Its guiding principle is ‘Big Fish Eat Little Fish,’ mainly by the debt dynamic that crowds out the promised economy of free choice. “. . . No economy in history ever has been able to pay off its debts. That is the essence of the ‘magic of compound interest.’  Debts grow inexorably, making creditors rich but impoverishing the economy in the process, thereby destroying its ability to pay. Recognizing this financial dynamic most societies have chosen the logical response. From Sumer in the third millennium BC and Babylonia in the second millennium through Greece and Rome in the first millennium BC, and then from feudal Europe to the Inter-Ally war debts and reparations tangle that wrecked international finance after World War I, the response has been to bring debts back within the ability to pay. “This can be done only by wiping out debts that cannot be paid. The alternative is debt peonage. Throughout most of history, countries have found again and again that bankruptcy – wiping out the debts – is the way to free economies. The idea is to free them from a situation where the economic surplus is diverted away from new tangible investment to pay bankers. The classical idea of free markets is to avoid privatizing monopolies, such as the unique privilege of commercial bankers to create bank-credit and charge interest on it.” ... Once bankrupt businesses have been restored to solvency, the usual practice is to return them to private hands; but a better plan for Fannie and Freddie might be to simply keep them as public institutions.  In the August 8 London Tribune, British MP Michael Meacher proposed this alternative for Northern Rock, a major British bank that was recently nationalized after becoming insolvent.  He wrote: “[W]hen the banks have failed the public interest so badly and still even now continue to pursue so single-mindedly their commitment to privatise their gains whilst socialising their losses, would not a publicly owned bank be the most effective way of changing the current corrosive financial culture of short-termism, lower investment, house price inflation, and insider enrichment at the expense of systemic fragility for everyone else? Perhaps we should not return Northern Rock to the private sector after all.” Perhaps we should not return Fannie and Freddie either. (09/06/08)

What is the Failed State Index?

Foreign Policy -- Whether it is an unexpected food crisis or a devastating hurricane, the world’s weakest states are the most exposed when crisis strikes. In the fourth annual Failed States Index, FOREIGN POLICY and The Fund for Peace rank the countries where state collapse may be just one disaster away. When troops opened fire in the streets of Mogadishu in early May, it was a tragically familiar scene in war-torn Somalia. Except on this day, soldiers weren’t fighting Islamist militias or warlords. They were combating a mob of tens of thousands rioting over soaring food prices. On top of the country’s already colossal challenges, a food crisis seems an especially cruel turn for a place like Somalia. But it is a test that dozens of weak states are being forced to confront this year, with escalating prices threatening to undo years of poverty-alleviation and development efforts. The unrest in Mogadishu echoes food riots that have erupted on nearly every continent in the past year. Tens of thousands of Mexicans protested when the price of corn flour jumped 400 percent in early 2007. Thousands of Russian pensioners took to the streets in November to call for a return to price controls on milk and bread. In Egypt, the army was ordered to bake more loaves at military-run bakeries after riots broke out across the country. Kabul, Port-au-Prince, and Jakarta experienced angry protests over spikes in the price of staples. But if few foretold the hunger and hardship that have followed the uptick in prices, the events of 2007 revealed that unexpected shocks can play a decisive role in the stability of an increasing number of vulnerable states. Primary among last year’s shocks was the implosion of the U.S. subprime market, which burst housing bubbles worldwide, slowed trade, and sent currencies into tailspins. A contested election in Kenya in December swiftly shredded any semblance of ethnic peace in a country that many had considered an African success story. And though Benazir Bhutto feared her own assassination upon returning to Pakistan, her murder reverberated in a country already contending with the challenges of ambitious mullahs, suicide bombers, and an all-powerful military. These shocks are the sparks of state failure, events that further corrode the integrity of weak states and push those on the edge closer to combustion. As the food crisis has shown, these political and economic setbacks are not unique to the world’s most vulnerable countries. But weak states are weak precisely because they lack the resiliency to cope with unwelcome—and unpleasant—surprises. When a global economic downturn pinches the main export base, an election goes awry, or a natural disaster wipes out villages, the cracks of vulnerability open wider.  (09/06/08)

Today, ~26,000 Children will Die!

This is equivalent to: 1 child dying every 3 seconds 18 children dying every minute A 2004 Asian Tsunami occurring every week An Iraq-scale death toll every 15–36 days Almost 10 million children dying every year Some 60 million children dying between 2000 and 2006 The silent killers are poverty, hunger, easily preventable diseases and illnesses, and other related causes. In spite of the scale of this daily/ongoing catastrophe, it rarely manages to achieve, much less sustain, prime-time, headline coverage. The continuation of this suffering and loss of life contravenes the natural human instinct to help in times of disaster. Imagine the horror of the world if a major earthquake were to occur and people stood by and watched without assisting the survivors! Yet every day, the equivalent of a major earthquake killing over 30,000 young children occurs to a disturbingly muted response. They die quietly in some of the poorest villages on earth, far removed from the scrutiny and the conscience of the world. Being meek and weak in life makes these dying multitudes even more invisible in death. (09/06/08)