Sir,
It occurs to me that the sudden desire to “privatize” Freddie Mac and Fannie Mae [1] is simply a way to deploy the wet ink dollars out of the Fed and big banks without overwhelming the money supply. We all know what would happen if those dollars entered the mainstream market place. This just seems to me to be yet another ploy to stall the inevitable, but I haven’t seen anyone else talking about that. Am I missing something? – Big Jon
JWR Replies: You are essentially correct. The majority of the U.S. Dollars that have been magically created by Quantitative Easing (QE) have been used to buy up Mortgage Backed Securities (MBS) derivatives [2] paper. This was $70 billion per month in QE2 and $85 billion per month in QE3, and this has been going on month after month. QE2 began in November of 2010, and QE3 began in September of 2012.
Quantitative Easing doesn’t do much for the real economy. It is really more of an asset swap that benefits high level financiers. They reap the benefits, while only a portion gets trickled down into the economy at large. It is a grossly inefficient mechanism for boosting the economy, but it has done great things for the bottom lines of the investment houses. It has proved to be just the trick for re-inflating the bi-coastal real estate bubble [3]. Quantitative Easing effectively increases the money supply, since lower interest rates let banks generate more loans. (It unleashes the fractional reserve banking multiplier effect [4].) But because all of that QE money is top fed and directed primarily at the real estate sector, it is creating false prosperity for both the residential and commercial real estate markets. Granted, a lot of that money is almost immediately reinvested in other vehicles/sectors, but that doesn’t change the fact that this money is created out of thin air, and in he long run it will prove to be very inflationary. And, as I’ve mentioned in my blog several times before, inflation is a hidden form of taxation [5]. Creative legerdemain like QE might outwardly look low risk, beneficial, “and all that happy stuff” but the long term effects will be devastating: Injecting all this artificial money encourages malinvestment, encourages casino style investing, discourages thrift, and does little to build up a long term economic base in sectors like manufacturing. A decade from now, we will look back on QE as one of those World Class “What on Earth was I thinking?” varieties of big mistakes.
All of the recent talk of “privatizing” Fannie Mae and Freddie Mac largely ignores that fact QE money has already been used to prop up both of them. A report issued by the St. Louis Federal Reserve Bank in 2011 [6] notes:
“The first round of QE began in March 2009 and concluded in March 2010. One of the primary goals was to increase the availability of credit in private markets to help revitalize mortgage lending and support the housing market. To accomplish this goal, the Fed purchased $1.25 trillion in mortgage-backed securities [MBS] and $200 billion in federal agency debt (i.e., debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae to fund the purchase of mortgage loans). To help lower interest rates in general (and thaw the frozen private credit market), the Fed also purchased $300 billion in long-term Treasury securities.”
In July, 2013, the House Financial Services Committee pushed forward a bill that would Liquidate Fannie Mae and Freddie Mac. It was heralded by HuffPo [7] as a way to “…dramatically reduce the U.S. government backstop in the mortgage market.” But in actuality, it is not privatization (or, more properly, re-privatization.) It is simply a new venue for Uncle Ben’s Instant Rice Dollars. You and I (indirectly, through dilution of the value of the U.S. Dollar) will be paying to “privatize” Fannie and Freddie. Most of the “privatization” money will be coming from QE Dollars! So the bottom line is that our wallets will be fleeced to enrich a bunch of Wall Street mortgage financiers.
The opinion molders at HuffPo go on to say:
“The House bill would abolish government-controlled Fannie Mae and Freddie Mac within five years and replace them with a non-profit, utility-like platform that investors would use to securitize mortgages. Unlike mortgage securities offered by Fannie Mae and Freddie Mac, the new securities would be issued without a government guarantee.”
Oh, really? That might sound great on the surface–as if it will take the American taxpayer of the hook–but what is really going to transpire? Instead of two great big assets for the taxpayers (with a huge underlying liability), they will become assets for the banksters. But here is the kicker: the bankers have been implicitly told: “Don’t worry: you are Too Big To Fail”, and we will always bail you out. (And they have been, again and again. It is no coincidence that the $182 billion government bail out of American International Group (AIG) in September, 2008 came just a week after the government takeover of “quasi-private” Fannie Mae and Freddie Mac. The real story didn’t emerge until two years later [8].) So we–the American taxpayers–will give up the assets, but retain the liabilities. How charming. And the banksters won’t be using their own money to do this. They will be using the unending stream of QE Funny Money–that again, is a hidden form of tax! Someone with a corner office on the 67th floor with a great view of Central Park must be saying: “Sounds like a ‘win-win’ to me!”
As a blogger who lives out in The Hinterboonies, I am just a distant observer of all these machinations. I can only shake my head in disgust. I know that writing more letters to my senators and congressman will be futile. But one thing that I can do is step back and look at the big picture: The folks in Washington D.C. and their banker buddies are systematically destroying the U.S. Dollar. They are doing so because the American people are ignorant and treated like mushrooms (i.e. kept in the dark and fed Schumer [9]) by the mass media. There is nothing that I can do to stop it. But I can protect myself from the inevitable resulting mass inflation, by shifting most of my assets out of Dollar-denominated investments and into tangibles [10]. The D.C. crowd can debase the Dollar all they’d like, but they can’t erase the inherent value [11] of a box of .45 ACP Hydra-Shoks. I recommend that you diversify, similarly.