Good Times on the Way?


Share traders are having second thoughts about the Fannie
and Freddie party. Wall Street initially surged after the US Federal Reserve “rescued”
the mortgage giants, Fannie Mae and Freddie Mac. But those early gains were all
but wiped out by a slump the following day, as traders took a harder look.

So what happens now?

The Fed certainly did the right thing with its very
expensive rescue. It had no choice.

The global economy could all too easily have slipped into
recession if it hadn’t. The consequences could have been unthinkable. Our grandparents know how
the Great Depression of the 1930s ended: with World War II.

Justice is often pushed aside when emergency strikes and that
is certainly happening now. US
taxpayers will be left with a bill of at least $US100 billion for this rescue. In
the meantime, the mortgage brokers who precipitated the crisis by selling
worthless deals to careless lenders escape free. Taxpayers will be left
with shares in Fannie and Freddie that they almost certainly would not have
chosen themselves. Who, after all, would want to buy shares in institutions
like these, which still have so many dud home loans on their books?

One analyst, calling himself hobojaimie, summed it up neatly:
“There goes the Baby Boomers’ retirement accounts,” he wrote. “Up in a haze of
hallucinogenic smoke. Now they can all roll their upside down mortgages into
Fannie and Freddie stock certificates and smoke ‘em, right down to the
cockroach.” A cool, if unconventional, assessment.

Civil libertarians, like Phil Gramm, should also be called
to account. These simple-minded theorists laid the philosophical foundation for
the unrestricted market excesses which produced the still spreading US credit
crunch. But Gramm, who was once thought to be a likely Treasury Secretary in a
McCain administration, still sees no fault in his free and unregulated market
policies. The public is at fault, he claims instead. In Gramm’s view, the US is
suffering only from “a mental recession” and Americans have become “a nation of

economist, Paul Krugman, has a different take again. He warns against excessive
optimism in the wake of the F&F rescue, arguing that it needs to be seen in
“a larger context”. He notes that US
house prices have been tumbling since the credit crunch hit a year ago, a
phenomenon which has prevented many borrowers in the US paying off heavy debts.

Fancy lending, based on products allied to reverse mortgages,
reached much higher levels in the US
than in Australia.
So a young family signing up for a mortgage on a new house might well have been
asked if they would like a new car as well. The extras could be financed at a
very cheap rate, the bank manager would say, by adding them on to the mortgage.

When foreign lenders, particularly in Europe and China, began to
worry about US debt levels and the ability of US borrowers to repay, the credit
crunch became unavoidable.

Krugman compares what is happening in the US now to events in Japan in the late 1980s. He points to the credit crisis there which led to a decade-long
slump in the Japanese economy. Furthermore, Krugman notes, “[US] asset prices are still falling: losses are
still mounting and the [US]
unemployment rate has just hit a five year high. With each passing month, America
is looking more and more Japanese”.

He argues that, despite the very expensive rescue of Fannie
Mae and Freddie Mac, US authorities may still not have done enough to revive
the American economy. The US,
of course, is no longer the engine of the world economy but it still plays
a very important place.

Right now, confidence in the economy matters for two

Oil prices fell again, overnight, by some $US3 a barrel. A
few weeks ago, a fall like that would have been taken as a sign of likely
global recovery, as fuel became cheaper. Last night it was seen as an
indication of an imminent downturn in the world economy.

The second signal, though, might ultimately be more
important for Australia.
Commodity prices have also eased over recent days. And the Australian economy,
as we all know, has been running on the commodity boom for years.

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