Monday, March 10, 2008
Fannie Mae and Freddie Mac will save us! Not!
You have to say the word "Not!" in the title of this piece in the same way that Dana Carvey used to say it, as Garth, in Wayne's World. Because if Gary North is right, the two major US government providers of mortgage securitization (i.e. the buyers of dodgy sub-prime mortgages, bought using the proceeds of US government-backed bonds) are currently holding themselves up financially in the same way that Wile E. Coyote used to hold himself up once he'd run over a cliff face. That is, with an increasing lack of belief.
Via its dollar profligacy over the last few decades, fuelled by the abandonment of the last tatters of the gold standard in 1971, and by its setting up of these numerous "government sponsored enterprises" to buy votes with, the US government has ensconced itself within a terrible Stalingrad-style financial pincer. The final hand is about to be played and at stake are all of the chips on the table.
The US government must either order the Federal Reserve to print as much money as Fannie Mae and Freddie Mac need to securitize millions of appalling high-risk mortgages, thereby triggering the final humiliating collapse of the dollar (Operation Zimbabwe Mk I). Or it must cut these two GSEs off at the knees by repudiating any obligation for their bonds, thus applying a wrecking ball to the entire American housing market. This, obviously, will then scuttle the entire American economy (Operation Zimbabwe Mk II).
However, going one better than this, it would seem that from the $200 billion dollar bubble promise just made by Bernanke and the latest GSE credit spread picture, that both OpZMkI and OpZMkII are going to be exercised at one and the same time. Fancy that! The Germans are going to break out of Stalingrad and attack Moscow at the same time.
Well, what do you do now if you're in the bunker back in Berlin? You can either hope and pray, much as Ben Bernanke is doing. Or you could get Gary North in to advise you. Yes, his advice will be extremely unpalatable and almost impossible to implement in the face of the interests of Wall Street and the PC establishment, but what I imagine would be the tough medicine of doing absolutely nothing except turning off the printing presses, will foreshorten the oncoming depression by at least half, and possibly by much more.
Whichever way it works out, if you are an Austrian, and if you believe Gary North is closer to the truth than virtually any other economist alive, it is time to batten down the hatches and prepare yourself for a 1990s Japanese style economy for the next ten years. (Or run screaming into the hills - take your pick.) Because if Ben Bernanke and all the other clowns in the US government really outdo themselves, what we're really looking at is a Zimbabwean style economy across the entire face of the western world. I just hope I come out the other side with a shirt on my back.
Though personally, to avoid having to deal with this, I have decided to repudiate all of this mad Austrianism and I am now swinging full-square behind Gordon Brown, and his view of the British economy, that it is robust (whatever that means) and that it will weather the storm without any intrinsic link to the US economy causing us much harm at all.