Free Markets, Free People

The Beginnings Of The Problem We’ve Been Warning About

What if we wanted to borrow a bunch of money and no one would lend it to us? How would that affect the “stimulus” or bailout? The government would have to either raise taxes or print money, wouldn’t it? One leads to an extended recession and the other leads to the same thing plus inflation.

Guess what?

Asian investors won’t buy debt and mortgage-backed securities from Fannie Mae and Freddie Mac until they carry explicit U.S. guarantees, similar to those given on bonds issued by Bank of America Corp. or Citigroup Inc.

The risks are too great without a pledge that the U.S. will repay the debt no matter what, according to Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., and other bondholders and analysts in Japan, China and South Korea interviewed by Bloomberg. Overseas resistance may hamper U.S. efforts to hold down home-loan rates and shore up the nation’s largest mortgage-finance companies.

This shows a real lack of confidence in foreign investors.  If you want to view it this way, this is a de facto downgrading of the credit rating of the two FMs. And, as pointed out in the final sentence, this may trip up efforts to hold down interest rates for home owners. It certainly means trouble for the plan to refinance Freddie and Fanny and for the mortgage bailout plan.

And as the problem deepens, the effort to borrow money for the FMs will only get harder. My guess is that’s just a prelude to the same problems being encountered more broadly as the government tries to borrow the promised stimulus money. This is a very dangerous, and in my estimation, unnecessary road we’re traveling. The law of unintended consequences is setting up an ambush the likes of which we’ve never seen before.


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5 Responses to The Beginnings Of The Problem We’ve Been Warning About

  • The “New Era of Responsibility” has been reduced to a button.
    Put it next to your Gerry Ford “Whip Inflation Now” button.

  • This sounds like something we maybe should have checked on before the bill got passed…

  • Sorry, until I hear Chinese, Japanese, Korean, or Taiwanese Government official say the same thing, I have no worries…sure the private sector in Japan isn’t dumb, but the governments are scared of losing their export competitiveness, and thus jobs.

    In the meantime, they keep buying or risk appreciation of their currency in the long run.

  • Let us not forget that we are in a world wide recession. There just isn’t as much loose cash around to stick into US securities. Perhaps they are also following the excellent advice of our political leadership, using their cash to stimulate their economies instread of saving it.

  • Did our wise and knowledgeable leaders actually think that ANYBODY would but FM securities now without an iron clad guarantee? At least we know they aren’t con men, they are just stupid.