SeriousBull

The Chaos Theory of Foreign Policy

Tags: Fannie Mae + Fed + Fredie Mac + Ginnie Mae + Sallie Mae + Treasury

At the twilight of the receivership of Fannie Mae and Freddie Mac one can only wonder why the wait. The $5 trillion in mortgages guaranteed by these government sponsored entities consist of many “Liar” (stated income with no verification) or “Ninja” (no income no assets)

loans and other inflated residential mortgages  soon to be worth some 25-40% less than their face value.  The stock market has correctly anticipated the Fannie Mae & Freddie Mac shareholders’ demise. What’s up with the government then–why the procrastination to dump shareholders that many Americans, including the Bush Administration, believe should take the punishment for their mistakes?

The answer is that from the US Government’s perspective it would be better to not have them be a direct (debt) obligation and to remain a private obligation. The reason has to do with Uncle Sam’s very own credit rating. With a $10 trillion deficit before the housing debacle price tag, social security and medicare/medicaid entitlement payments increases, and more deficit and stimulus spending on the way, the risk is that foreign investors (Japan, China, Russia, and the UK) may demand greater than the 2-4% interest on their money to finance our debt.  This also explains why NO ONE IN THE US GOVERNMENT  is publicly talking about Ginnie Mae, the government national mortgage association that guaranteed tanker loads of sub-prime and moderate income mortgages processed through banks and mortgage originators and sold around the world, here to pension plans and mutual funds and overseas to sovereign governments.

Indeed, this ‘cost of capital’ issue is central to the policy actions investors should keep their eye on both now and into the future. The Fed has correctly lowered interest rates to create profit spread to bail out the banks and has maintained this low interest rate policy despite overwhelming evidence of rising inflation. The Fed understands that stopping the multiplier effect of lending will contract the economy and be an offset to inflation shrinking global demand. But the equilibrium issue is getting the balance of perception and reality right–fooling the world that all is solvent while the Treasury is endlessly printing money.  Investors should keep their eye on the puck. The Fed’s game will be to play a fast game with steady, reassuring commentary. The Administration (Treasury  and Executive Branch) will continue to favor uncertainty in the financial markets, even engineer it and this in a best case scenario foreshadows a range bound outcome in the markets for some time to come. In a worst case scenario it will erupt in a plan to pay back the deficit in inflated dollars.

We call it the “Financial Chaos Theory of Foreign Policy.” When you’re the greatest debtor nation in the world and your economy is bad and expected to get worse, you forumate disruptive policies preferring chaos, uncertainty, and fear. You can’t literally afford to have peace, stability and growth in the world because such an ordinarily desirable environment would cause investors to seek growth and higher rates of return than available on safe haven instruments like Treasury securities.

So as the leader of the free and Democratic world you might say the US may have a huge conflict of interest between what we espouse and what we must do. In this event is it not time for a world governing body, like the UN, to intercede and force the US to right its ship? To mandate it tax its citizens, cut spending, and clean up its balance sheet that imperils peace and stability? 

Preposterous you say, but be objective now. Ron Suskind in his new book “The Way of the World” has documented the fact that the US had a CIA operative inside IRAQ and knew that Saddam had no weapons of mass destruction yet the Bush Administration opted for war. It even espoused the new doctrine of “Preemptive Strike” to justify the war because it felt threatened.  Moreover, look at the provocation of Russia first by humbling them and  expanding NATO with former Soviet territories, and then by unilaterally reneging on the ABM and SALT treaties and next seeking to install missiles in their CUBA. Clearly this is hegemony and provocation and if its not chaos the US prefers by these, please then please what is it?

August 23, 2008 - Markets, Politics