Could the next bailout cost taxpayers trillions?
The Federal Reserve has already bailed out Bear Stearns. One has to wonder if it will eventually have to bail out another financial institution and if so, who? Could it be Fannie (FNM) and Freddy (FRE)? S&P recently published an estimate that a bailout of them could potentially cost taxpayers $420 billion to $1.1 trillion! (see article: The trillion-dollar mortgage time bomb). This would dwarf the inflation-adjusted cost of $250 billion that the government spent to bail out the S&Ls...
Unrelated rant: I'm surprised that the ratings agencies like S&P and Moody's have come out of this whole credit crisis in as good shape as they are. I know that Moody's stock has been cut in half from its highs, but that's nothing compared to the billions (probably trillions) of dollars that they cost investors, companies, banks, etc...by rating all sorts of garbage AAA when in reality it was much worse than that. How can anyone believe the ratings that these companies publish? I guess that it's good to be the only game in town...
Here's the funny part. S&P went on to say that the cost of bailing out Fanny and Freddy could be so high that it might cost the government its AAA rating. MWHAHAHAHAHAHA. Like a AAA rating from S&P is actually accurate or means anything (I know that it does to many people, but not to me).
Here's a shocking statistic that shows just how involved Fanny and Freddy are in the mortgage industry today. Less than a year ago, Q2 2007, they backed 46% of all mortgages in the United States. Guess what that number stands at today...50%, nope higher, 60%...higher, 70%...keep going...82%! That's right today over EIGHTY PERCENT of the mortgages in the U.S. are backed by one of these two companies that have the implied backing of the government. This percentage could even grow now that their capital requirements have been lowered and Congress decided to allow them to back mortgages of up to nearly $730,000 instead of only $417,000 (see article: A gift from the Beltway).
We better hope that this mortgage mess doesn't get a lot worse as some are predicting. The government needs to do everything it can to keep the economy humming along. People can talk about inflation until they are blue in the face, but if the Fed allows the economy to slow substantially and the unemployment rate to rise dramatically causing homeowners to stop making their mortgage payments it would be disastrous. If FNM and FRE end up needing a government bailout it could cause the U.S. dollar to really fall off of a cliff, creating huge inflation anyhow. I'm not saying that this is going to happen. As evident from my home purchased at the height of the bubble I'm no housing expert (I love my home and my neighborhood and have absolutely no regrets), but I know quite a bit about economics and I am studying the dollar...suffice to say that a massive bailout like this could be disastrous for the dollar.
No position in FNM or FRE