Fiscally Unsound, Part III

September 12, 2008 at 3:26 pm Leave a comment

Hey, as long as our government is taking care of the communist countries, right?  This economy is not fine, it’s not “fundamentally sound” as McCain says…it needs change (badly!) As I’ve said before (Part I, Part II), the Democrats are now the Fiscally Responsible Party. 

The Republicans are more concerned with Big Business than Americans; more concerned with Communist and Persian Gulf countries than America. 

From Jim Jubiak:  

Feds bailed out China, not the US


How is the deal cobbled together by Treasury Secretary Henry Paulson, the former Goldman Sachs (GS, news, msgs) CEO, bad for U.S. stocks and bonds and for the U.S. economy? Let me count the ways:


  • The deal adds $5 trillion in debt to an already stressed national balance sheet. That basically doubles the U.S. national debt and can’t help but push the U.S. dollar lower and U.S. interest rates higher in the long term. The U.S. government is going to have to sell more Treasury bonds to cover its new debt.
  • Taxpayers are on the hook for somewhere between $25 billion and $200 billion. That’s money that will have to come from higher taxes or from more government debt.
  • The need to sell more debt to fund this takeover will lead to higher interest rates in the Treasury market. (This is besides the rising tide of the annual federal debt. The Congressional Budget Office puts the deficit at $407 billion for fiscal 2008 and a record $438 billion for fiscal 2009.) Treasury yields are the benchmark for everything from mortgages to credit cards to corporate loans. Higher interest rates on Treasurys will push up mortgage and other interest rates.
  • The combination of faster growth in the money supply — as the government sells more bonds — and a weaker dollar will add to forces pushing inflation higher in the United States.
  • The decay in the financial fundamentals of the U.S. government could finally lead to the United States’ loss of its triple-A debt rating. A downgrade would force the U.S. to pay higher interest on its debt.
  • Higher interest rates will lead to lower economic growth. The Federal Reserve calculates the U.S. economy can grow at 2.5% or so before it risks setting off inflation. The extra debt burden from this takeover will make it hard for U.S. growth to hit even that relatively modest target.
  • And, yes, after being asleep for years as the problem grew and grew, the Treasury may not have had any alternative if it wanted to prevent an immediate meltdown in the U.S. mortgage market and in the U.S. financial system in general. But if the Treasury is serious about starting to shrink the mortgage obligations of Fannie Mae and Freddie Mac starting in 2010, the price of an immediate fix could be a double-dip slowdown in the housing industry in 2010. Less mortgage money available from Fannie and Freddie in 2010 sure isn’t going to help the housing industry sell houses.

Good for them

For China, on the other hand, the results of the takeover are almost uniformly positive:

  • The rescue bails out the banks and central banks that had put too much money into mortgage paper backed by Fannie and Freddie. At the end of 2007, Chinese banks held $376 billion in what the financial markets call agency debt.
  • Now the commercial banks in China — and the Chinese government — don’t have to worry about problems at Fannie and Freddie turning into problems on their balance sheets. Chinese banks are now free, therefore, to make more risky, ill-considered loans to domestic companies.
  • The People’s Bank of China can forget about the yuan appreciating too quickly, which would increase the cost of Chinese goods and cut into Chinese exports. Now the Chinese government can manage its exchange rate without worrying that buying more dollars to depress the price of the yuan would increase its exposure to something like a meltdown at Fannie or Freddie.
  • The U.S. intervention into its financial markets clears the way for the Chinese to intervene as deeply as they want without any foreign criticism. Who can say the Beijing government shouldn’t intervene to prop up Chinese real-estate prices after what the U.S. government just did? Chinese real estate has suffered an even worse drop than U.S. housing prices, with some cities showing a 70% drop from their peaks.
  • Pro-growth advocates in China just got another boost. China’s advocates of fiscal discipline and the need to fight inflation were probably fighting a losing battle anyway, since politicians everywhere are reluctant to risk the wrath of the unemployed just to cut a percentage point out of inflation. Recent actions and speeches out of Beijing indicate the government is gradually revving up the growth engine again. More-radical pro-growth officials have also advocated new policies that would prop up the prices of stocks and real estate. The huge U.S. intervention to prop up real-estate, bond and stock prices helps make their case.

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