Is the US Ahead of the Pack in Economic Recovery?
Sep 9th, 2008 | By Dan Denning | Category: Politics & EconomicsCould the US be ahead of the pack when in its economic downturn? “America has had its slower growth, weaker currency, massive housing meltdown and lived to tell about it. Now, with Fannie and Freddie taken into Uncle Sam’s bosom, America is ahead in the global game,” says Dan Denning in The Daily Reckoning Australia…
That’s the theme anyway. It’s probably true with respect to a country like Britain, whose currency continues to plummet and whose house prices won’t be far behind. Yet you don’t get the feeling that America’s fiscal position was substantially improved by this weekend’s action. The responsibility for the losses was simply transferred from a pseudo-public balance sheet to a very public balance sheet. How is that good for the dollar in the long run?
It isn’t. But in the meantime, the other losers this weekend are those financial institutions who owned preferred equity in the GSEs. The common shareholders never had any rights (and the recent ones, no common sense either). But according to the FDIC and there, “while many institutions hold common or preferred shares of these two government-sponsored enterprises, a limited number of smaller institutions have holdings that are significant compared to their capital.”
These smaller lenders are, ahem, screwed. The government intends to work with them on “capital restoration plans.” But if you thought this event signalled the end of the losses, think again. There will be more bank failures, and they will happen soon.
What about bondholders in China and Japan? They’ll be alright. We don’t know exactly how it will work. But somehow we reckon those GSE bonds will end up on the Federal Reserve’s balance sheet, in exchange for fresh new U.S. Treasuries (issued by the Treasury Department). In other words, we reckon the GSE bonds will be monetized.
Exactly how THIS is good for the dollar, well, you figure that one out. We can’t. However, we’re not going to stand in the way of a big relief rally. More on the story as it unfolds.
Source: The Last Capitalist in America
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Dan Denning is a contributing editor to Diggers & Drillers and a regular columnist for Money Weekly, a Taiwanese financial publication. From 2000 to 2006, Dan was the editor of Strategic Investment of Agora Publishing. His reporting and analysis for The Daily Reckoning is read by more than 500,000 people regularly.