Economic and market consequences of FNM/FRE bailout

Quote from KeithOmalley:

hey if you want to change the question 1/2 way threw the argument be my guest. all your points are well taken. but i was responding to someone telling me i was on crack because the USA does not grow at 6+%. my argument was, who cares that we have a deficit of 3% of gdp, if we are growing at 6%. and while i wish wikipedia was around when i was in college, i did get a degree in economics and mba in taxation, (in all honestly from a real crap school, if my writing ability is any indication ).

and while i don't want to get into a debate about inflation i honestly think a bigger concern is a japan like deflation. housing and banking bubble comming back to bite us.

Yes energy and raw goods have been going up in price. but really what else? i do know that transporting goods around using energy and making chemicals/ plastics and many other things utilizes much raw energy, but salaries are not going up. i went to my accountant this year, and it cost the same as last year, my rent went down this year, my sister has not gotten a raise in 2 years and housing prices are dumping. IMnot saying this will happen, but what if oil is $70 in 2009 and $35 in 2010? will that mean we will have a deflation problem? we all mock CPI and how it takes out food an energy, but there is a good reason to look at the core numbers. yeah, just my thoughts, and really are against the grain of everyone else. but it is something to think about, but i do know people will think im crazy for my though
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Fair enough.

But Real GDP and Deficits are both negative. Makes the point somewhat moot as its money supply anyway that governs inflation...

Deflation is a natural part of the business cycle. Thats what happens in recession. At market bottoms, when prices and input costs tank, business jump in with investment dollars at garage sale prices. That and properly timed low rates - not 2% at market tops.... - stimulate business investment and consumption recovery.

Japan went through a major fiat boom in the late 80's and 90's. Much like we did. Their real estate values doubled and in some areas tripled. There was no fundamental rational for this, much like US housing. So when banks, financiers and trading houses got caught on the wrong side, BOJ bailed out the Country with low rates and handouts.

Japans deflation was a natural result of a fiat money boom returning to mean (they always do). Problem is, the other part of the equation (recession) was not allowed to manifest in a traditional crash and flush. Rather, the BOJ opted to inflate and settle for anemic, near dismal growth for 10+ years while those underwater banks were allowed to suckle the Governments tit until their off-book Real Estate recovered into the black. I'm sure this sounds familiar....

Deflation is an unavoidable (and natural) consequence of the business cycle. Happens in every recession. In fact, its an unequivocal component of a recession.

Deflation has been painted as a dirty word to propagandize endless bailouts for Wallstreet. Afterall, deflation will destroy us all! Doesn't work like that, sorry. Its pure hype. Its better to flush quick and get it over with, then painstakingly scatch the bandaid for a day.


So yea, it goes inflation then deflation. Inflation is everywhere - food, energy and import costs (product costs). Insurance, medical, education to name some others. Wages will be next, you can bet on it. Housing is returning to fair value. Its not real deflation.

Cheaper oil and/or commodities is great for the economy. Cheaper factor input costs (namely, energy, commodities and technology) unlock dormant wealth otherwise locked and wasted in production cost. Things get cheaper, yet margins stay the same. People buy more at same profit margins = increase in GDP.

Supply side economics is where real, lasting growth comes from.

My 2 cents.
 
Quote from AMT4SWA:

FNM/FRE article........ http://www.infowars.com/?p=3292
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really really dumb question here.

the CEO of these 2 companies are they supposed to have the shareholders equity value as most important?

I ask this because if FRE is close to going into conservatorship where the shareholders would get nothing, would it be in there best interests to declare bankruptcy? Look at GRA and USG they did it to get the creditors off there back due to litigation of asbestos. and lets say shareholders would get pennies at most. isnt a penny better then 0? could bankruptcy stop the government from taking control and allow fre and fnm some time? yes this is a simplistic way of looking at it, and they could not do anymore borrowing, and there would be chos in the markets. but who should these companies be looking out for? there customers or shareholders?
 
common shareholders are last in the bag line...

subordinated creditor and the senior creditors are ahead of the commoners.

now lets say you bought some FNM bonds and also paid for a CDS since you want to guarantee the principle amount..and that insurance was very cheap years ago since what on earth could go wrong at Fannie and Freddie??

sounds good until your CDS counter party cant pay...or won't pay.

suddenly the world is upside down..

and you can use you Fannie bonds to clean out your fannie.
 
Quote from daddyeaux:

common shareholders are last in the bag line...

subordinated creditor and the senior creditors are ahead of the commoners.

now lets say you bought some FNM bonds and also paid for a CDS since you want to guarantee the principle amount..and that insurance was very cheap years ago since what on earth could go wrong at Fannie and Freddie??

sounds good until your CDS counter party cant pay...or won't pay.

suddenly the world is upside down..

and you can use you Fannie bonds to clean out your fannie.
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yes we all know common are last in line, but a normal ceo does not care aobut bondholders. this being a quazi government adjency blurs the line.
A ceo is suppose to maximize shareholder value. if that maximization is .02 cents instead of 0 they need to take the .02 cents. thats why bear took $2 instead of bankrupy
 
Quote from KeithOmalley:

it wont happen, but all paulson has t do is pick up the phone and every othr member of the 7 would do there part to push up the dollar as we did in 2000 with the euro.
Everyone saw what happened with Thailand last year, and the USA would be the last to impose currenct controls on the world currency.
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I would agree if we were at the start of this crisis, but the rest of the world is tired of lending us money to buy Escalades and plasmas only to have us walk from the debt.

my indicator is when the 10 year trez. drops 10 points in one day.

a 12% export economy can't support a 75% consumption economy

our only exports are crack and porn.
 
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