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.
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.