Speaking of government bail outs (which we weren’t, but anyway) the long anticipated move by the US government to fully finance and support Fannie Mae and Freddie Mac appears to have finally come to pass this morning.
The US government has in all but name nationalized both institutions. It effectively means that the US government owns nearly half of all outstanding mortgages in the United States and follows on the heels of news last week that the UK government was offering “free” mortgages to first home buyers.
As Moody’s chief economist points out “the federal government has now become the nation’s mortgage lender.”
How much money are we talking about here? It is, wait for it, USD$5 trillion, that’s USD$5,000,000,000,000 in home loans. That is one big exposure to the mortgage markets that the government is burdening its taxpayers with.
But sleep easily, because US Treasury Secretary Hank Paulson thinks that the government may only have to cough up a maximum of USD$200 billiion to cover any debt shortfalls. That’s USD$200,000,000,000 - which still looks like a whopping big number to us.
Let’s just put these numbers in perspective. Over the past few years you have all read about the massive debt hole that the US government is in, how it is unsustainable, how the country is living beyond its means. The current US national debt (although by the time you receive this email it will be higher) stands at USD$9,674,134,313,303 so in one fell swoop you could argue that the national debt has been increased by over 50% to just under USD$15 trillion.
Read This to Avoid State Politics
We hope that readers in Western Australia and New South Wales are able to tear themselves away this morning from the excitement that has engulfed politics in those two states. Based on what we’ve seen of these three-ring circuses we’re sure you can.
This Could be the Time to Book Your Holiday
For those planning a holiday to the US this could be a good thing. Will investors really want to be holding onto more US dollars than they really have to? Could this be the opportunity to see the Aussie dollar rise further as investors look for security in a commodities based currency? Afterall, Australia is sitting on a big pile of resources that the global economy actually wants and needs.
The true value of the US economy can be represented by the decision of Standard & Poor’s whom have downgraded the preferred stock of Fannie and Freddie to “junk” status, yet it has reaffirmed the US government’s Triple A credit rating.
Clearly it would be political suicide for S&P to downgrade US government debt, so it won’t. Of course the Treasury has the benefit in that it can arrange for more money to be printed if it gets short of cash - about as economically astute as applying for a credit card to pay off a credit card bill!
But, on the plus side, after seeing the Aussie dollar fall from close to parity with the US dollar down to around USD$0.80, this could be the catalyst that sees it on the move north again.
Banks Regain Popularity
Not surprisingly, Australian finance stocks such as ANZ, NAB and Macquarie were up strongly in early trade this morning as the ‘free market’ got itself all excited by the US government intervention!
Will the hysteria last? Adding liquidity back into credit markets was only half of the problem. The major issue was the quality of the credit, the amount of it, and the ease by which it was obtained.
Improving liquidity now may only delay the impact of the full extent of the credit freeze as cheaper credit may encourage a re-emergence of the bad habits of the past.
Cheers.
Kris
