fanny mae and freddie mac

Times and conditions change so there is not a static answer.

A decade or more ago people (Americans or otherwise) with money to invest tended to do it in the world's fastest growing economies - the Good Old USA was the leader. Not true any more, so as I said: Trickle Down, TD, still works -it just does not benefits much the USA because now the USA is now far from the world's fastest growing economy.

The people with money to invest (Americans or otherwise) are still investing in the world's fastest growing economies - places like Brazil, Russia, China, and India (the BRICs) plus a lot of others in the mid East (Dubai etc.) and the Far East like Vietnam, Indonesia, even Australia and Korea - but certainly not in the US where factories are closing and the economy is sinking.

Thus putting more funds in the hads of the rich, I.e. TD, mainly promotes growth in the BRICs and these other places. In contrast, what you called Trickle Up, putting more money in Joe Amnerican's hands does mainly help the US economy as Joe will buy things local, not invest globally, some of which necessarily are made in the US, like a dinner at McDonalds, ball game tickets, his hair cut, or that dog his kid has been begging for, and even a few bigger "ticket items" like an new lawn moyer with its US made Brigs and Straton motor, or a travel trailer for his lot on the lake, a new boat for it too.

"Helicopter BEN" (former head of the FED) was right at least on this. He said if you really want to sitmulate the US economy, take the money and thow it out from a helicopter over poor neighborhood." Don't give it to the rich to put in the bank, which BTW is exactly what I did with the $300 check I recieved during GWB's first recession. It was while waiting in the line with others to deposit our checks, that I first realized how stupid these debt building tax rebates to the wealthy were.

Thank God for that check - it has been worth more than a million to me as it made me realize that with GWB in charge, and TD, the US dollar would go under. So I immediately got a lot of mine out of US (into ADRs) ~6 years ago. They are up ~8 fold now, even with the slight recent recovery of the dollar.

SUMMARY: Years ago, when Regean did it, TD was an efficient aid to the US economy, but now that the US is not growing and some competitors are with double digit GDP growth, TU is more efficient than TD to stimulate the US econoumy. - McCain does not agree- he is for TD still - in this he is not any change from the Republican GWB practices - just more of the same failed GWB economic policy.

by edit later: I was more having fun than seriously accurate in my post about my meeting with Milt. I agree with your post 100. In fact, I can add to it. The Phillips curve was briefly a "great economics advance." - It told politicians what to do in case of stagnation ("pump prime" with easy money & government spending) and in case of inflation (tighten the money supply, & delay government contracts, etc.) but then came "stagflation" and Phillips was speachless - an exposed fraud as that could not happen, but it did.

 

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I'm kind of shocked we let them get away with not publishing that data.

 

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How could we not? We have no authority over what they do.

 

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Most of 'we' dont know what it is...and even if 'we the people' did know, its not sexy enough to become a election issue.

Obama went through a phase when he little other than spell out details of his policy...but he was shouted down, party members wanted him to bring back the inspiring speeches, the poetry and the platitudes.

The American public wants someone they can have a barbeque with...not someone whos going to save the economy.

 

The US underwriting of any possible debts accrued by Fanny and Freddie seems to be working very well on the World's stockmarkets. Except, curiously, China, which should benefit from the assurance as much as anyone.
A collapse of either of these companies would have led to global recession.
It might happen anyway, but I think that this move has shortened it.
Well done America!

 

I agree that the FHA takeover (expansion of government control of the economy by 5.3 trillion dollars) WAS NECESSARY.

Yes, prevention of US's financial collapse before this Friday was a good idea. It surely would have collapsed if Fanny and Freddy had not gotten help to pay the bonds that have now matured, actually are slightly over due, as that required payment is at least $150 million more than their total assets. I.e. they would have defaulted on the bonds without this takeover. If they had defaulted, then most of the banks carrying these bonds on their books at face value would also suddenly have debts greater than their assets. I.e. the entire US banking system would be exposed as bankrupt. That was avoided so US stocks, which were depressed by this risk, became relatively much more attractive and people pulled money out of developing country stock markets all over the world, not just China, to invest in US stock market. (Brazil’s stock index fell 2.3% on Monday, according to the headline in today’s paper.)

A collapse of the banks would of course trigger a run by the population on the banks, hoping to get their money out before the doors are closed in a federally declared "bank holiday." (The banks cannot with stand everyone wanting their money out at the same time even when the economy is booming.) The FDIC would of course ask the Treasury to print the dollars need for everyone to be paid with when the bank holiday was terminated and the banks reopen their doors, but of course with this huge increase in dollars in circulation (plus the 100 billion just given out as tax rebate stimulus)* everyone would understand that each was worth much less. - To take a simple example the very same man who last week wanted $3 for a hot dog will NOT sell it for that price any more. He probably will want about $50 for his hot dog and still not be sure that the green paper he is receiving is a valuable as the hot dog he is giving.

SUMMARY: Everyone's savings are wiped out over night, but at least the national debt is easy to pay now. There will be emergency legislation or new money issued to correct the false capital gains: For example, that small house, which last week you could buy for $200,000, which the owner bought some years ago for $100,000 is now sold at 10.1 million dollars and the capital gain the seller get to pay taxes on is 10 million dollars! This is impossible so, one solution is:

In less than a month you will get a notice to turn in your old dollars (100 of the old ones for each new one) to make these false capital gains go away. I did not bother to try to forecast the numbers -only to help you understand why it was necessary for GWB to make that greatest expansion of "big government" in the history of the US.

------------------------
*There is little mystery as to why the FED stopped telling the M3 data – it would already show that the dollar is dead, if people knew how many have recently been printed. My three years old prediction of October 2008 as the opening of the window for the run on the dollar to begin is only 22 days away now. – I think this takeover will delay the financial collapse of the US for these three weeks at least.

 

I completely agree. I was really making a generalization across time as there will always be real world differences (though only because there are transaction costs...in the absense of those Coase predicts the assets go to the highest values use). That said—and i this I am akin to the monetarists—I do not think there's a effective way to determine which targeted tax cut will be more effective from fiscal year to fiscal year. What drives the targets of tax policy is not economics, it's politics. The Democrats have the poor as their base. The republicans do not exactly "have" the wealthy, but they are disproportionately strong amongst them, and buying off the wealthy is (a) never a bad strategy in and of itself as they tend to have influence and (b) plays relatively well in America amongst the middle and lower classes because our national mythology gives us a strong impetus to strive for wealth.

"Fraud" may be a touch harsh, since the model worked brilliantly until people started trying to manipulate it, and economics is all about the phrase "ceteris paribus."

It was like a wormhole. A wormhole connects to distant regions of spacetime and the distance between those two points through the wormhole is much less than the distance through normal space. If something goes through the wormhole, though, it tends to collapse, so no one can ever use it to shorten distance traveled. I wouldn't call whomever first discovered wormholes in the equations for general relativity a "fraud."

As I recall the story, Phillips built a hydraulic simulator (a computer, basically, though water powered) that simulated an economy under the Keynesian model. That's where he first noticed the relationship between the two. He then gathered data in Britain for about 100 years and published a paper on that limited topic, noting the relationship from the mid-19th century to the mid-20th in Britain. I was taught thought it was Samuelson and Solow who really championed its use as a policy tool, at least in the U.S. (after the Phillips Curve for the U.S. was established).

Phillips was more of an engineer than an economist, but the Phillips curve, as tweaked by Friedman (and, working independently, Edmund Phelps), is still measured and analyzed. On the other side, plenty of economists have advanced positions that have no solid basis in the real world, like say the Laffer Curve which inspired tax cuts in the early 80s and caused government revenues to decline, and even they aren't necessarily "frauds."

 

As I recall, it didn't work then either.

Unless by "the economy" you leave out the vast majority of the individual's economies involved.

 

By accepting responsibilities for the liabilities of Freddy and Fanny, the US is opening itself up to a potential $5 Trillion worst case scenario debt.
It is a courageous, and potentially disastrous decision for America.

 

You would prefer that 5 trillion collapse now?

Actually, without this past week-end actions, ALL but very few tiny US banks would now be banrupt and the magnitude of the US 's problem before this next week-end would easily exceeed 50 Trillion dollars.

Besides your 5 trillion is very un reasonable as it assumes that the value of all the houses Fanny and Freddy have mortages on have collapsed to zero. If I can buy houses for less than $1000 each (as you are assuming but probably do not realize) then put me down to buy of 10,000 of them (or only 2,000 of them, if I can not finance 80%, and must pay cash. - I will gladly sell all my investments to raise the 2 million required.)

 

No, I think it was the right decision, but I can hardly believe it was made.

OK so there is still value tied up in the bricks and mortar.
People will always need houses.
But if those companies now crash, the US will be for sale at a knock down price.

 

Still, if down goes these companies...down goes America now.

 

If the USA expanded it's money supply dramatically it could create enough inflation to push housing prices high enough to make the bad mortgages into good mortgages. Debtors would win, lenders would loose and banks would stay solvent. Banks are middle men; the borrow from some and lend to others. The government would not have bail out anybody. Future tax payers would win because money created is money that does not have to be borrowed from China.

It feels wrong to screw the savers/lenders because they are the people who lived within their means and prepared for their own retirements.

 

This time, you are not even "esentially correct" as you were when falsely telling that Fanny and Freddy make loans. You are correct that rapid inflation wipes out most of the debt and so is good for net debtors; but banks are much more than just "middle men." They are net lenders and so would go under without government help.
Here is how it works:

5,000 people, including Bill, have deposits of $200 each on average in the bank "A" but the bank is confident they will never all want their money back at the same time, so they lend 80% of it out to others and of course charge these "others" 40% more than they pay to their 5,000 depositors as interest on the loans. (Nice ~20% profit on someone elices's money.)

Now Joe, is one of the borrowers as he is building his vaction cottage on the lake. He used his loan to pay for materials he bought from Tom, the brick maker. Tom did not have any immediate need of the money so he deposited it bank "C" to earn some interest until he need to buy a new brick delivery truck. Bank "C" also lent out 80% of all its deposits too. and so it goes.

In the end, Bill's 200 deposit has thru the bankng system become at least $1,200 in loans (it is called the multiplier effect and usually mentioned when telling that if the FED makes a million dollars of need money (as credits in banks eventually etc.) it really has made 5 to 15 times more money available to commerce. My point here is that the banks as a total are net lenders (1,200 loaned - 200 in deposits) = net of $1000 in loans made possible by Bill's $200 deposit. They are much more than "middle men." They are creditors holding the loan notes with face value much greater than the total real wealth (discount of the multiplier) that was deposited. If those loan all go bad they are in trouble.

Can any one say "Bear Sterns" or today "Lehman Brothers" ? See:
http://www.bloomberg.com/apps/news?pid=20601087&sid=alaxZ3VB7A8o&refer=home

Although other factors were envolved here too.

 

and here is one from Forbes showing Us debt is really about 70 trillion already:

http://www.forbes.com/forbes/2008/0929/034.html?partner=globalnews_newsletter

That does not make GWB's current historic 407 billion dollar increase in the debt (in the just announced budget - > 500 billion when done) look so bad now does it?

Get your kids out of the US so no one trys to sell their livers in China to pay off their share of the debt.

 

Awesome!

"But neither presidential candidate is acknowledging our nation's true insolvency, let alone providing real solutions..."

No candidate could ever tell the truth and expect to get elected.

Bad news doesnt sell.