Great Depression Online Archive Issue:

Taking Out The Bazooka

Great Depression Online
Long Beach, CA
August 26, 2008

Inside This Issue You Will Discover…

*** The Keen Interest of a Circus Patron
*** Stating The Obvious
*** Taking Out The Bazooka
*** And More

“There’s a sucker born every minute.” – P.T. Barnum

The Keen Interest of a Circus Patron

Last week was the annual gathering of world improvers in Jackson Hole, Wyoming.  There a select group of economists, academics, and policy wonks get together each year to brain storm on how to best tinker with the economy.

Our invitation must have been lost in the mail.  Still we observe with the keen interest of a circus patron…gawking at the knife jugglers, fire breathers, and lion tamers…always on the lookout for a severed finger or worse. 

For it’s the things that don’t quite go according to plan that make for the greatest shock and awe…not the three eyed hunch back limping around with a gaping hole in his head.

And as it just so happened, Willem Buiter, professor of European political economy at the London School of Economics and Political Science, was part of the jamboree.  Yet we doubt he’ll be invited back for next year’s event.  For he committed the stately sin of saying what everyone knows to be true…but pretends is not.

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To a gasping audience, Buiter alleged…

“The Fed listens to Wall Street.”

“‘Throughout the 12 months of the crisis,’ Buiter contends, as reported by Jeannine Aversa for AP, ‘it is difficult to avoid the impression that the Fed is too close to the financial markets and leading financial institutions, and too responsive to their special pleadings, to make the right decisions for the economy as a whole.”’

Stating The Obvious

Of course Buiter was just stating the obvious.  But stating the obvious in certain settings – like eating meat – is taboo.

And another obvious fact that doesn’t receive much note is the idea that we’re not living in a free market economy.  This goes counter to the popular ideal, which espouses the grand virtues of free markets and democratic capitalism.

Yet how can the Federal Reserve be anything but a revulsion to free markets when they control the economy through fixing the price of money?

And how can the Federal Reserve be democratic when it’s run by an unelected – appointed – Board of Governors?

If the Russians were unable to come up with the proper price of toothpaste and toilet paper does a board of appointments somehow have the omnipotent insight to properly fix the price of an economy’s most important commodity – its money?

In a truly free market would the rate of interest (i.e. the price of money) ever be set at less than half the rate of inflation?

Taking Out The Bazooka

Just last month a law was enacted that gives the Treasury Department the power to buy stock in Fannie Mae and Freddie Mac.  Of course using the public purse to buy shares in two enterprises trading on the New York Stock Exchange is hardly the stuff of free markets.

At the time, Treasury Secretary Henry Paulson told the Senate Banking Committee, “If you’ve got a squirt gun in your pocket, you may have to take it out.  If you’ve got a bazooka, and people know you’ve got it…you’re not likely to [have to] take it out.”

By this he meant that just having the power to prop up Fannie Mae and Freddie Mac share prices would be enough to prevent their rapid selloff.

On August 22, 2007, Fannie Mae and Freddie Mac stock were trading at 69.38 and 64.89, respectively.

On July 15, 2008, at the time of Paulson’s squirt gun speech, they were trading at 7.07 and 5.26.

On last Friday, August 22nd they were trading at 5.00 and 2.81.

As you can see, these stocks are rapidly approaching zero.  And Paulson may have to take out the bazooka after all.  This would effectively nationalize Fannie Mae and Freddie Mac…and by extension half the U.S. mortgage industry.

What else does this mean? 

Here we’ll answer with a question…

Who knows?

But whatever it means, it can’t be good.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Should the U.S. Treasury proceed with bailing out Fannie Mae and Freddie Mac, taking on the liability for these enterprises could further sink the dollar.  Protect your assets by investing abroad is a prudent and sound money management in this era of high risk and low yield at home environment.  Learn how to get into high-yield foreign securities here: High-Yield International.

 

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