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The Howl Of The Taxpayer, The Shriek Of The Budget, And The Takeover Of Fannie Mae And Freddie Mac
by Paul Wallis

The Fannie Mae and Freddie Mac takeover has underlined one thing about the US economy. You can stop the bleeding, but until you get the nutcases with the chainsaws, you’ve got an ongoing problem. The US housing industry needs sanity more than morality.

People can be moralistic about housing later, the principles of lending need an overhaul, and they need it now. The almost incomprehensible level of damage done to the US financial sector is costing money by the second.

The banks and other lenders, apparently not content with murdering their own markets, took it one step further, and decided to go after the paying customers as well. Foreclosure could now be described as a national sport.

In the process of doing which, they’ve cut their own cash flow, and “acquired” assets with steadily shrinking values and the costs of foreclosure and resale.

Genius, this isn’t.

The Great Chicken of Fiscal Propriety has laid a severely scrambled egg. Humpty Dumpty would come a very distant second.

To unscramble this mess will require some objectivity, not an unlimited supply of band aids and whimsical interest rate moves.

The billionth of a cent which is the per capita contribution from the average taxpayer is being put to unavoidable use. Fannie Mae and Freddie Mac had to be taken over, because nobody else would touch them.

The Fannie Mae and Freddie Mac takeovers are code for the fact that without them, the US economy would be at risk of trillion dollar hits. It wouldn’t be just the lenders and borrowers who took the hits.

It’d be the whole country.

There was never a choice. If they went under, so would the financing of a very large piece of the US economy. Banks would founder, investment funds would go under, pension funds would get wiped out. The net effect would have been like an all out nuclear strike on the country’s assets. It was a no-brainer, and it was done when it needed doing.

That’s the good news.

The bad news is that there’s every reason to believe that nobody’s learned much from the fallout. The lenders are still doing business like it’s their personal Christmas every day, with no indication of any attempt to reflect economic realities. Apparently the people who gave us the credit crunch, the subprimes and the housing collapse still haven’t learned to use calculators or read the news.

This is the first open check written by the US revenue system outside the defence context. Even if it had to be done, it shouldn’t have had to be done. Exactly what this will mean to future budgets is unpredictable, at best. Tax cuts and unknown revenue costs are not a healthy mix. They sound good, they’re a theoretical stimulus, and there’s absolutely no way of knowing what effect they’ll have.

Nor is there any way of knowing what revenue demands will be. Just recently the Fed ran out of money for a roads program, and it’s become more or less institutionalized that government workers pay is a major issue in budget bills. So you can assume that the revenue system has a few problems of its own. America is a net borrower of money, and there’s interest to pay on that, too.

I don’t think even a masochist would want to spend too much time figuring out the US revenue system’s exact liabilities. Let’s just say any possible real surplus is quite a way down the track, and it’s a track where your suspension can expect a few tests.

If you were to do a credit rating on America’s revenue system, it would have gone from AAA to B+ in 15 months, an accelerated Enron-like performance. That’s thanks entirely to the various crises in the financial sector, which have gutted revenue on state and Federal levels. It’s also put the skids on revenue growth, which translates through the whole economy as lack of funding.

People who aren’t making money don’t pay taxes. That notion seems to have escaped the tax cut addicts. It’s a barely plausible idea that a revenue system which needs money, and lots of it, will naturally benefit from cuts. The only real way to increase net revenue is for America to get back in business, making money, without the routine catastrophes.

The FMs are the symptom, not the disease.

If lending practices don’t grow up, get toilet trained, and start doing real business, the disease will remain.

If the financial sector doesn’t get its head out of whatever part of its anatomy it’s found is nice and dark, and start doing credible deals, investors will get the hell out of Dodge.

That’s exactly what they’ve been doing. Even the hedge funds, which have mainly survived reasonably well, in comparison to the retail markets, have been experiencing a drastic, 75% drop in new funds, relative to last year. That’s pretty significant, because last year they were getting calls on deposits at record levels, so that’s 75% down on something pretty lousy.

The absolute bottom line here is that investment capital doesn’t have to hang around in the US waiting to go broke. Another point the US financial markets might like to consider is that if there isn’t an actual physical disconnect between the US markets and the world, there’s a lot of interest in one.

Quite a few global financial institutions managed to avoid exposure to the subprimes, and are doing quite nicely competing with a crippled, cash-strapped, discredited US companies. If you’ve been wondering what sector failure looks like, take a few photos.

So stop whining about your corporate taxes. You're still alive, aren't you? If it’s a choice between death and taxes, maybe now’s not the time to be umming and aahing.

I still think the US taxpayer has a real shot at becoming a registered charity.

Published: Sep 7,2008 23:28
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