Housing Bill: What’s the Bottom Line for Investors?
Jul 28th, 2008 | By Eric Roseman | Category: Politics & EconomicsThe housing rescue bill looks like it will pass into law before the November presidential elections. This marks the beginning of the nationalization of American housing. It also means the raising of the US national debt ceiling. But is the bailout justified if it delays or helps avoid an economic day of reckoning?
The bill would authorize the government to invest US$30 billion in Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) while insuring up to US$300 billion in refinanced mortgages. The housing crisis is now in its second year, and shows no signs of stopping. This crisis also triggered the sub-prime mortgage debacle 12 months ago. Other assets, including stocks, bonds and some commercial real estate sectors have all deflated since mid-2007.
So what’s the bottom line for the United States and investors?
As a result of footing this enormous bailout, the government will raise its debt ceiling to US$10.6 trillion dollars from the current cap of US$9.8 trillion dollars. Heck, what’s a few hundred billion dollars when you’re the Fed and you print your own fiat currency?
The nationalization of American housing has therefore begun. And not everyone in Congress and the public is pleased with this new legislative proposal.
Dissenting Senators exclaimed the bill would ultimately cost taxpayers more than US$1 trillion. Adjusted for inflation since 1991, the last rescue (Savings & Loans) cost about US$400 billion.
Also, once again the government is coming to the rescue of big financial firms. These giants, like Bear Stearns, are too big to fail. The sad truth is that if the government did NOT bailout Bear Stearns and rescue Fannie and Freddie, the global financial system would suffer a severe blow. Banks would tumble like dominos, a string of mortgage defaults would occur nationwide and a hard recession or worse would ensue.
Morale hazard argues against government bailouts. But at what point is a bailout justified if it saves or delays the economic day of reckoning? Is a government bailout warranted if it saves the financial system?
Source: Let’s Add Another Few Hundred Billion to Our Deficit, Shall We?
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