I've had enough! With today's seizure of Fannie Mae and Freddie Mac by the U.S. Government, I have to wonder, "Is the United States truly a free market economy?" In a true free market system, companies are judged by their decisions and prowess at generating extraordinary profits. Companies issue securities to be bought and sold in the open market to value the company and respond in real-time to its decisions.It seems with the current mortgage crisis, "free market" has become a misnomer. The Bush Administration continues to use language like "protecting global markets" as reasons for bailing out yet another flawed financial services company.
From the Associated Press:
“A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance,” [Treasury Secretary Henry] Paulson said.But more importantly, “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe,” he added in a televised announcement.
Are Fannie and Freddie different from a Countrywide, IndyMac, or Bear Stearns? Well, yes, they are. Because they own about half of the total housing debt in the country, some believe their collapse would have meant a global financial meltdown possibly leading to rampant inflation and even a global depression.
But that's the doomsday scenario. What if the Government allowed Bear Stearns to fail? What if Fannie and Freddie were accountable to their multiple years of questionable lending and mortgage acquisition practices? Free market economies are supposed to correct themselves. The theory says that when free markets overheat, they correct, sometimes violently. We're seeing that now. The problem is that the government isn't allowing for this natural correction to take place. What about Enron, Arthur Anderson, and Martha Stewart? Where's the accountability in the financial services industry?
We have no idea how deep this crisis can go, but we know the government won't allow it to get there. With a Republican White House, one has to wonder if the party truly is about having smaller government, reduced spending, privatization, and, of course, open and free markets?
Over the last few months, the Bush Administration with Paulson (a former Wall Street executive with formal and informal ties to all of the companies he has bailed out) have flip-flopped on their party's most coveted stance--free markets. From the Associated Press:
Officials defended this approach by saying it underscores the importance of the trillions in mortgage debt that each company either holds or guarantees and the need to make sure that investors in this country and overseas keep buying this debt.
And herein lies the rub. The U.S. economy needs international investors to buy risky debt. That smells like HUGE trouble regardless of any bailout, doesn't it? If investor confidence overseas plummets in the US mortgage market, the dollar will continue to fall precipitously versus all currencies--and that could even happen WITH this bailout.
The real question then is, how much protection are these bailouts really providing? If the governmenet has to seize Freddie and Fannie, then we should expect this housing crisis goes deeper than any of us know. The common man's access to the data used to make these decisions aren't made public so none of us knows exactly what they saw before acting. That's what scares me.
I want to jump into the housing market because there seem to be opportunities. But today's action will keep me on the sideline not for months, but years. I get the feeling we haven't seen ANYTHING yet.
