The Real History of Fannie Mae And War Spending

September 8. 2008

Elaine Meinel Supkis

As always, when a very desperate US saves itself by taking on more and more red ink or by printing more money at the Federal Reserve, the whole world rejoices. The most fearful thing for all our trade rivals is for the US to balance its books and balance its trade with the world. All energies of all other nations are focused on only one thing: to keep the US spending money which increases our debts. This is exactly how revolving credit companies operate. They keep lending in trickles and keep the balance due growing. This way, profits rise. But there is always the possibility of bankruptcy interfering with this delightful scheme.

Pearlstein of the Washington Post:

In wresting control of Fannie Mae and Freddie Mac, and in authorizing the Treasury to begin purchases of mortgage-backed securities, Secretary Henry M. Paulson Jr. has taken responsibility for assuring that low-interest loans will continue to flow into the country's hard-hit housing markets. Not since the early days of the Roosevelt administration, at the depth of the Great Depression, has the government taken such a direct role in the workings of the financial system.

Although the details of yesterday's takeover are complex, the rationale is quite simple: to restore some semblance of normalcy to the housing market. Paulson and other policymakers think that until that happens, neither financial markets nor the wider economy will be able to regain their footing.
*snip*
Until this weekend, Fannie and Freddie have been unique entities -- for-profit, shareholder-owned companies that were required by government charters to provide low-cost capital to secondary mortgage markets in good times and bad. And for most of the past 40 years, the companies have managed to balance those missions fairly successfully. Shareholders have earned a better-than-average return on their investment, while homeowners have had access to mortgages that not only have lower rates than in other countries, but rates that they can lock in for up to 30 years.

I have read a number of stories about Fannie Mae and watched with dismay as a faux history has been proposed concerning how Fannie Mae operated in the past and how it changed into the monster entity it is today. Why was Fannie Mae the 'unique entity' it was before bankruptcy? How did this quasi-government agency that was sort of government but not quite, operate? And who did what, when? And did this happen while I was an adult? If so, how can the operators, creators and instigators of this system not know its history?

HAHAHA. The key to the reality is rusty and hidden in the tall grasses by the Gates of the Banking Wealth, aka, the Cave of Death! As usual, I go to the actual news stories from the past. In this case, Time magazine has a wonderful article from back in February, 1978. Now, why did I know to google that month and that year and thus find the right story?

HAHAHA. I was trying to buy a house back then and couldn't get a standard mortgage! I finally bought a house at 9.75% which the private owner extended to me, himself. No cheap mortgage! But it was realistic. Only two years later, though, thanks to all the 'rescue' operations of the government desperate to restart lending, after raging, hideous inflation, interest rates went up to over 18% before the demon goddess, Inflation, had her wings clipped.

Mr. Lake, who lent to me at 9.75% was philosophical about all this: 'Hey, I'm still making money and I didn't have to spend a penny to give you this mortgage so I am still ahead of the game. I just wish I was MORE ahead of this game, that's all.'

Time Magazine, 1978: Feud over Fannie Mae

There is a personality clash between the liberal, Humphrey-style Democrat Pat Harris and Oakley Hunter, a former Republican Congressman from Southern California. Their deeper problems center on policy: Should Fannie Mae retain its semi-independence, as Hunter wants, or should it bow to HUD directives, as Harris insists? Specifically, Harris feels that Fannie Mae is far too concerned about making money—last year its profits rose from $127 million to $165 million—and too unconcerned with stimulating mortgage lending for low-income housing in the cities.

For its first 26 years, Fannie Mae was a Government agency. In 1968 Congress turned it into a private, profit-oriented company answerable primarily to its stockholders, both individuals and institutions. But the President was given the right to fire its directors "for cause," and HUD was granted some powers to limit Fannie Mae's borrowing. It raises billions of dollars a year in private markets and then buys mortgages from banks, savings and loan associations and other lenders, giving them money to invest in other mortgages. Currently, Fannie Mae holds about $34 billion worth of housing debt. In a war of nerves, Harris in recent months has not granted big new borrowing authority to Fannie Mae, but instead has doled it out in dribs and drabs.

OK: here is the truth, at last! For the first third of Fannie Mae's existence, it really WAS a government agency! In 1968, it was privatized in order to keep it off the government's ledgers. Why did this happen that year? Ah! There is some story here!

1968, I was in Europe, going to school. The dollars my dad gave me made me rather wealthy compared to everyone around me. I was on top of the world! But deep inside the dark chambers of the number crunchers in Washington, DC, they could see the flood of red ink from government war and social spending quickly bankrupting America. So during the disastrous 1968 elections, the government was seeking ways to balance the budget while still going to war in Vietnam.

Sounds awfully familiar, doesn't it? The government was very aware of Inflation spreading her shining wings and taking off. The winds from her wings beginning to flap were loud enough that the metal currencies were all being rapidly devalued. This happens always when there are wars. Copper is replaced with zinc or iron. Silver or gold is used to coat what used to be real silver or gold coins, etc. By 1964, this process was beginning. In 1968, the 'sandwich' coins were pouring out of the mint and we began collecting the 'real' coins.

Into this stew came Fannie Mae: there was a dispute about lending. Lending is all about the future value not of housing but CURRENCY. The mandate of Fannie Mae is to enable cheap lending by insuring and holding cheaper loans banks did NOT want to hold. But when the goddess of Inflation takes wing, these rapidly become a hole in Fannie Mae's pocketbook. So Fannie Mae was beginning to flounder because wild government spending was destroying the future value of the dollar.

Please note in the Time Magazine story from 1968 that HUD was set up as a RESTRICTOR to prevent Fannie Mae from growing too fast! This irritated politicians. They needed Santa Claus to jump down every chimney in America and give us houses! So they wanted to stop restrictions on lending. Now, there is a golden ribbon that ties the Goddess of Inflation's wings so she can't fly: the restrictions of the gold-based currency and other barriers to lending. By making lending harder via either higher interest rates or other restrictors, balance can be achieved and true wealth comes from the balance of restrictors versus the needs and propulsive force of capitalist manufacturing profitability. When manufacturing and trade generates profits, these can be amplified via the banks in the form of loans that lead to more capitalist activity in the markets.

But when governments are spending heavily on WARS, then this goes haywire. Of course, business booms as the wild spending fiends in the government buy tons of stuff. But this is not good capitalism, it is dire capitalism. It is more like cannibalism for it eats the domestic economy. The only way to control inflation during war is to ration goods. Even so, once a war is ended, the currency always begins to collapse unless the government can isolate it behind a wall of punishing interest rate lending costs! As we saw with the end of the Vietnam war, Inflation shot upwards filled with power, joy and fury. Reeling Her back to earth nearly destroyed all commerce.

So here we are: the wars in Afghanistan and Iraq are now as expensive as the War in Vietnam. The neocons who engineered this disaster are now busy little bees trying to restart the Cold War! The US spends more on military ventures than most of the planet put together. The US government has been running in the red now for most of my life except for one year. And the reckless spending has increased nearly every year this last 8 years. On top of all this, the overspending was done during the biggest stock market and housing bubbles in US history.

Normally, a government runs in the red when the economy is bad, not white-hot. Normally, during flush times, taxes pour in. But the US cut taxes when higher taxes were very necessary. During the Vietnam war, it being very unpopular, the government didn't raise taxes to keep up with spending. We know this is very inflationary. Yet we did it once again, expecting no inflation?

This takes me back to the people screwing up everything: most of them are my age or older. They should have some dim memory of what happened in the past! If I can still remember stuff and tie it into my own life struggles, then why can't they?

HAHAHA. They can't because they all lived in this massive bubble that protected them from everything! Being a black sheep of the ruling class, I was cast out to survive on my own. So I had to live by my wits. This means all the storms and terrors of life were not spared so the memory of all these things are burned into my brain. But the writers today who try to tell us what is going on: they can use Google just like I use it. They won't and can't. This is because they prefer to refer to each other, not the past. This way, they can come up with some goofy story that tells all while being nothing but increasingly stupid lies about the past.

S&P cuts Freddie, Fannie stock ratings to junk

S&P said the two mortgage giants' senior unsecured debt ratings remain at AAA for long-term issues and A-1+ for short-term debt, with a stable outlook on both ratings.

However, the agency lowered the firms' preferred stock ratings to C -- a "junk" level or non-investment grade -- down from BBB-, after having placed those ratings on watch Aug. 26.

Look at how everyone struggles to make this shrinking shoe fit increasingly bloated feet! The debt rating is triple A because everyone expects the government, which now has reversed itself and taken back Fannie Mae, to pay everyone every penny including the interest due, on bad loans. Sweet, isn't it? The Chinese and Japanese demanded this boon, by the way.

This is why their stock markets are soaring! And even as their markets soar, their currencies are DROPPING. This, in turn, will flood the US with their manufactured goods. The game of 'beggar thy neighbor with cheap trade' continues and the beggars for credit are countries that are forced into having strong currencies despite HUGE trade deficits! The theory behind the entire concept of the Floating Currency launched 5 years after a desperate Federal government ditched Fannie Mae is simple: if a country has a trade SURPLUS, their currency should be stronger than countries with trade DEFICITS. This then automatically balances world trade because the currency relative value works as a ballast or regulator.

Instead, it is the exact opposite: countries with huge trade surpluses are the ones that can afford to keep their currencies weak! Which makes things get WORSE! This is at the heart of the US mess. The US has only one tool left: higher interest rates. We have to strangle our own domestic markets if we want to balance trade. The only tool we have is to have a recession. The idea that we should have old-fashioned tariffs or barriers is verboten.

From exactly one year ago at my own blog: US Reserve Continues To Pour Fake Money Into Banks

All the data shows that the US economy has begun to slow down back in 2006. This always happens when the Federal Reserve is forced to raise interest rates after they give inflation free rein. For the last year, the US has had to pretend there is no recession due to higher interest rates but now the chorus of froggies croaking for rate cuts is deafening. But the Fed can't because they cut rates way too much only a mere 4 years ago! The housing collapse continues to worsen and the central banks make inflation rage with their injections of funds designed to drop rates and so many cows are coming home, the barn is collapsing, so many birds are coming home to roost, the tree branches are breaking and there is poo all over everything. Poop, poop, poop. What a mess.
*snip*
The US has created massive inflation in the past. I once did a study of the history of US LIBOR rates and it is obvious when the US starts them good ol'e printing presses. A general rule of thumb is, it takes twice as high rate hikes to kill Reserve-created inflation than the rates that normally keep inflation under control. So if the Fed suddenly is tempted into saving the stock or asset markets, the resulting inflation is twice as hard to stop since everyone then assumes there will be increasing inflation and so they plan for and even demand, increasing inflation. This can cause a spiral upwards as everyone fights to stay ahead of this spiral as it grows faster and faster.

As usual, I was focused on the important parts of what is going on. The world is rejoicing because the US public and our government is again, on the hook. The evil of over-lending is continuing. Last year, I predicted massive inflation and we got it. Inflation isn't continuous. It comes in waves. Every time the bankers and government shoos away the goddess of Inflation, she circles around and makes a new attack. This is because she is a vulture. If we keep dead bodies scattered about, she comes to eat them. It is her nature!

The rescue of Fannie Mae is very inflationary. Note that ALL the news stories boast about his this legendary rescue will mean CHEAPER LOANS. Oh, goodie. The goddess of Inflation is licking her chops.

Dell said to consider sale of factories

(MarketWatch) -- Dell Inc. reportedly might sell its factories as part of a strategy to overhaul its production model to cut more than $3 billion in annual costs within the next two years.

The Wall Street Journal reported Friday that Dell could sell its factories within the next 18 months to contract manufacturers, most of which are based in lower-cost Asian countries. Dell has about 60 manufacturing or research facilities in 20 countries.

The sale of its factories would suggest Dell is still groping for ways to accomplish its goal of improved profits despite the return last year of founder Michael Dell to the role of chief executive.

Venancio Figueroa, a Dell spokesman, said the company wouldn't comment on "rumors and speculation." Figueroa repeated that Dell has said it wants to work more closely with manufacturers in order to "reduce costs and make products in a timely fashion."

Dell is selling all its factories to...THE CHINESE! Oh, lord. I remember talking to the Chinese officials about this in the 1980's. We agreed that ownership always evolves into the hands of the people who hold the physical manufacturing base. And so it is: the Chinese had no money and had to nearly enslave themselves to the G7 powers to gain these factories. But being very hard working and extremely intelligent and well-educated, they used their mental pry bars to separate the G7 capitalists from their own factories and even their own research facilities!

One by one, US or European ownership of things in China is collapsing. The fall of the Chinese stock market is actually part of this process. The Chinese government doesn't want foreign money pouring into Chinese futures markets! The US begs for this money. China forbids it. The US is going bankrupt. China is getting richer.

Japan's Bonds Decline on U.S. Rescue of Fannie Mae, Freddie Mac

(Bloomberg) -- Japan's 10-year bonds declined the most since May after the U.S. government seized control of the two largest U.S. mortgage-financing companies, easing concern that a yearlong credit crisis will worsen.

The takeover of Fannie Mae and Freddie Mac set off a surge in Asian stocks and a drop in government debt, lifting Japan's 10-year yields to the highest in almost five weeks. Treasury yields had the biggest gain in two months. Demand for debt was also limited before the Ministry of Finance sells 1.9 trillion yen ($17.5 billion) in five-year notes at an auction tomorrow.

``We are closer to seeing the end'' of the credit crisis, said Takashi Nishimura, an analyst in Tokyo at Mitsubishi UFJ Securities Co., a unit of Japan's largest bank by assets. ``It was a good step in the right direction and the stock market reacted positively and the bond market reacted negatively.''
*snip*
``There will be an unwinding of flight-to-quality and that will translate into selling pressure in the JGB market,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo. The plans to buy Fannie and Freddie ``may put the brakes on the financial market turmoil.''

Japan's bonds are the poor men of the bond world. Since these bonds are trapped in a 0% interest system from hell, they are basically worthless to anyone but the insane. This is why Japan's government is falling, by the way. The LDP can't keep creepy sons of former war criminals in office for more than a year! HAHAHA. Kiss them all goodbye and good riddance.

Mitsubishi Chemical: Ready To Accept Investment From Middle East

TOKYO (Nikkei)--To secure a stable supply of crude oil at low cost, the company is prepared to accept investments from oil-producing countries in the Middle East as long as the Japanese firm retains management control.

Japan has one of the largest trade profits on earth. And are going bankrupt due to this 0% interest banking system. Now, they are reduced to begging OPEC to buy them up, please! This is funny as hell. Oil is very expensive in Japan because of the fake depression which enables the cheap lending. And now, Japan pays a heavy premium for oil. They are desperate to fix this while keeping the yen weak! Note how their stocks shot up today due to the yen weakening against the dollar.

This is PURE BUNK: the dollar is NOT stronger due to the US government now taking on trillions more in obligations. Yet, this is how our trade rivals have shoved things into a backwards system that works totally contrary to the monetarist theories of Floating Currencies!

Wall Street Trading Gets Zero Value From Lehman, Merrill Owners

(Bloomberg) -- Lehman Brothers Holdings Inc. is trying to sell its fund-management unit to cover further mortgage- related writedowns. If it does, what's left won't be worth much, based on how investors value the firm.

Lehman's market capitalization of $11.2 billion is almost equal to the value of its asset-management arm, which includes Neuberger Berman Inc. That leaves its main business of trading stocks and bonds as having little worth. The numbers are similar for Merrill Lynch & Co.: Take out its retail-brokerage and asset- management businesses, and the investors' valuation of the rest of the third-biggest U.S. securities firm is zero.

After being the most profitable business on Wall Street, generating more than $65 billion in pretax profits for the four largest U.S. securities firms between 2002 and 2006, trading has become a black hole. It still accounts for about half of the revenue at the Wall Street firms. Yet Lehman Chief Executive Officer Richard Fuld and Merrill CEO John Thain have been unable to convince shareholders to attach a value to the businesses.

Now Lehman will be zeroed-out. The Silver State Bank which babysat McCain's son, Andrew, has just gone bankrupt. Many banks will declare bankruptcy soon. And all will flock to the Federal Reserve and the US government to be funded, saved or given vast powers to create even more credit out of thin air. I don't see any sane resolution of all this. Each banking collapse of the last 60 years has been worse than the ones before it to the point, we are now comparing this series of collapses to the Great Depression.

This is because nothing is ever fixed. The fix is not in the banking system, it is in the nature of our own empire. We cannot afford to have the world's biggest military spending. We can't afford thousands of bases all over the planet. We can't afford to run the US like the Soviet Union. We are in trouble and the only door to safety is to drop this notion of ruling the earth.

It is no shock to me to see that one of the cities with the highest crime rates is Washington, DC. Once we leave all the government buildings, we enter vast, dying slums filled with abandoned buildings. Virtually no businesses. No hope. Wave after wave of 'prosperity' washes over America and our national capital remains mired in poverty. Now, the backlash of all this wild spending that gave the illusion of wealth will crash over our entire nation. Soon, we may all be living in clones of the Washington, DC slums.

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Comments

[ralph]

Dear Elaine,
You are soooooo right about DC. I was there a few weeks ago. Its a total slum. The odd thing is, some parts of town look as if once upon a time, it was a nice lively place. Robust commerce etc... This FNM,FRE bailout is just the beginning im afraid. GM,F,AIG,LEH,WM,etc.. all need bailouts. Fiat money knows no end. The Goddess of inflation will spread her wings and destroy this once fantastic country. Our forefathers are rolling in their graves!!! "If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." Sounds eerily familiar to todays FNM/FRE bailout. GOVT now owns 50% of all mortgages. All 10 planks of the communist manifesto are in place. We are done as a sovereign nation. NAU here we come. SICKENING

[Elaine Meinel Supkis]

Ah, but the good news is, interest rates for mortgages which are at a NORMAL 6.5% will to around 5%! HAHAHA.

Gads. I have paid far more than 6.5% for loans in the past. This is pure insanity.

[ralph]

Insane it is my dear lady. Thank you so much for informing so many. Your words and cartoons are the only form of sanity in media. You are the BEST!!!

[Anthony]

I told you so... Nobody will buy Lehman, because it's cheaper to let it go bankrupt, and buy the pieces.

on top of that When Lehman is bankrupt, the rest of big banks will be so much weaker too. (cheaper to buy)

But this is story for the future. The biggest mess will be holiday/winter season retail number. After that, a lot of bankrupt little companies... than it all gets nasty.

[RobG]

Denninger is putting out an early warning of a cascading event:

So Now It Begins (Credit Event Fnm/Fre) (Link)

Oh, this is what a little birdie was talking about last night....

"Thirteen ``major'' dealers of credit-default swaps agreed ``unanimously'' that the rescue constitutes a credit event triggering payment or delivery of the companies' bonds, the International Swaps and Derivatives Association said in a memo obtained by Bloomberg News today. Market makers for the privately traded contracts will discuss how to settle them in a conference call at 11 a.m. in New York, the document said."

So much for the law of unintended consequences.

What does this mean? Nobody knows. There's never been an event of this size.

Remember, what everyone was worried about with Bear Stearns was that a "credit event" could cause a cascade failure in the financial system.

Well, now we get to find out if there is really a risk of such a thing, and who gets rammed with the costs when this all winds down.

Keep your pantyhose on for this one - it could get interesting, and is especially interesting in light of the insane levels of euphoria being experienced in equity markets today.

[Paul S]

English common law states that possession is 9/10ths of the law. The Chinese will certainly follow this rule. It's fitting that DC is surrounded by slums; it shows everybody how the DC power elite REALLY feels about the rest of us. Measured by county, 6 of the 7 wealthiest counties in the country are the counties that surround DC.

[Bear of Little Brain]

On the dark side, you speak of Vietnam. I think of My Lai.
I cannot get the vid to play (it's the London Times, BTW), so read this and weep:
http://tinyurl.com/5gdrbp

On the light side, here is Monty Python's depiction of King Inflation meeting Black Night Bernanke. Fannie and Freddie? Just a flesh wound!
http://www.youtube.com/watch?v=mjEcj8KpuJw

As I post, da Boyz whacked gold and silver as soon as London closed, the S&P appears to be rolling over and Lehman is down 18%-ish just now, although both may be treated to the usual Lazarus-like resurrection later (used to be around 2.15). It's getting so silly, I find myself laughing where, before, I used to panic.

[RobG]

Here is a little more on the 'credit event':

Fannie, Freddie Credit-Default Swaps May Be Settled

Investors may be forced to settle contracts protecting more than $1.4 trillion of Fannie Mae and Freddie Mac bonds against default after the U.S. seized control of the companies in a bid to bolster the housing market.

***snip***
The actual money exchanged may be limited, though, according to analysts at CreditSights Inc. Buyers of the contracts are paid face value in exchange for the underlying securities or the cash equivalent.

A Fannie and Freddie credit event also would be the biggest test to date of a process by which the market settles most contracts without an actual exchange of the securities. Under that process, dealers hold an auction to determine a recovery value for the securities, which is then used by investors to settle the contracts.

[Elaine Meinel Supkis]

Yes, while everyone here has been feeding stories about the Credit Default mess that is impending, I was writing about all this.

So enjoy the True Story about how the credit default markets were created. Lots of steamy sex with slithering goddesses.

[Christian W]

I'm with you Bear. It's done wonders for my bloodpressure since I started laughing about the silliness of it all, despite the truly awful aspects behind it.

[rockpaperscizzors]

So, anyone going to jail? Naaaaaaahhh. I think the big news of FM&FM takeover is the corporatists board of directors and the alphabet soup of freeloaders/traitors are not in JAIL. Rather, they're being rewarded for highway robbery and the taxpayers are being fitted with leg-irons for these pirates and politcians deeds. Too bad the little people paying for the big boys greed won't have the cash/credit to spend on more of the same foreign crapola that sits broken in maxed-out closets, and rental storage units. The foreigners can pawn off that cheap toxic, worthless, no quality, zero warranty crapola onto someone else.