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fanny mae and freddie mac -
a summary

Fannie Mae and Freddie Mac

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fanny mae and freddie mac - a history
fanny mae and freddie mac - the best politicians money can buy?
fanny mae and freddie mac - clearing up the mess
fannie mae / freddie mac - a round-up/summary
bank systemic contagion marker GDP 1: gross domestic product [GDP]
first and second round effects of external prices rises on inflation marker GDP 2: GDP and other quality of life measurements
supply-side economics - laffer curves and 'trickle down'

the mechanics of inflation : The great government swindle and how it works

the sum of a geometric sequence: or the arithmetic of fractional banking
on stimulus spending and multipliers

fannie mae / freddie mac - a summary
on who should pay
the impact on banks

No reform plan that does not curb Fannie Mae is worth the paper it is written on.

  1. The FMs are not serving the purpose of giving the poor an edge.
  2. The FMs have become a democrat slush fund corrupting politics.
  3. The FMs are far too big, and are seeking to compete in the free market with huge government subsidies!
  4. This problem was long foreseen, particularly by the Bush administration.

“Wall Street Journal's [...] board argued that taking on Fannie and Freddie would be President Bush's biggest challenge after toppling Saddam Hussein.” [Quoted from washingtonian.com]

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As you will see, George Bush has long fought for reform at Freddie Mae, with the usual lack of support from the Democrats.

Bush administration attempts to strengthen Fannie and Freddie regulation from 2001 onwards

“Just the Facts: The Administration's Unheeded Warnings About the Systemic Risk Posed by the GSEs

“For many years the President and his Administration have not only warned of the systemic consequences of financial turmoil at a housing government-sponsored enterprise (GSE) but also put forward thoughtful plans to reduce the risk that either Fannie Mae or Freddie Mac would encounter such difficulties. President Bush publicly called for GSE reform 17 times in 2008 alone before Congress acted. Unfortunately, these warnings went unheeded, as the President's repeated attempts to reform the supervision of these entities were thwarted by the legislative maneuvering of those who emphatically denied there were problems.

April: The Administration's FY02 budget declares that the size of Fannie Mae and Freddie Mac is "a potential problem," because "financial trouble of a large GSE could cause strong repercussions in financial markets, affecting Federally insured entities and economic activity.”


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on who should pay

The question is, essentially, are those who incurred the debts going to repay them? Or is more tax to be taken from the lenders and redistributed to the erstwhile borrowers?

Look at what John Maynard Keynes said, one of the truly great intelligences and economists of the last century.

“Thus inflation is unjust and deflation is inexpedient. Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The individualistic capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient - perhaps cannot survive - without one.” [Quoted from Essays in Persuasion, p. 75 - Social consequences of the changes in the value of money, 1923]

Thus, taking the approach of Keynes, which I fully embrace:

If the damage to the weak is likely to be great, then it is the rentiers who must take the greater strain.

This is, essentially, a political judgement and decision.

What is at issue here is how much strain is to be put on those who took the cocaine loans from the slick willies in the banks and in the city. Thus, who you bail out is a matter of where you place the ‘blame’ - with the dope peddler - the ‘slick willies’, or with the under-educated addicts.

It is important to limit [credit] addiction, but that requires far better economic education from the schools upwards.

The place of banks is not to get fools hooked, and then to exploit them to the point of destroying lives. But neither is it the banks’ role to socialisticly rule lives, by refusing loans to the deserving poor. It is the job of the banks to do risk assessments. And it is not the job of the government to stop the intellectually impoverished from making errors from which they may be expected to learn.

the impact on banks

If the cocaine addict, that is the ones who took the loans cannot, or will not, pay them back to the banks, then the banks will be less able to pay out to their depositors, and banks will go under.

As banks borrow from one another, if a bank cannot pay back to another bank, then cascades of bank failures can occur. This is known as systemic risk.

Remember that the money system is owned by the government. The government are monopoly producers of money. Thus, the banks are the subservient retailers in the system (for much more detail see the mechanics of inflation).

What is called a ‘bail-out’ is, in fact, a matter of choice. It is quite possible to allow all the weaklings, banks and depositors, to lose out. No money has disappeared, the money is merely in hands other than those who were expecting debts to be repaid, or deposits to be available.

A bail-out involves the government replacing the unpaid debts or deposits from the only source governments have - taxation; that is, by direct taxation, or through inflation. Those who did not repay their debts, effectively walk away, or are sanctioned in some manner by losing their credit rantings or, in some cases, by criminal changes of fraud. It is, of course, often extremely difficult to distinguish fraud from stupidity and from irresponsibility.

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