Fannie/Freddie Rescue: US Government Changes The Meaning Of ‘Free Market’

US Treasury Secretary Hank Paulson has once again shown to us that his definition of a ‘free market’ is not the same as ours.

In his view, a ‘free market’ means doing what he wants in order to protect the investments of others. And doing it at the expense of those who believe that the markets will always be free from interference or influence.

Mr. Paulson will now take the losses of every bank, investment firm, hedge fund, and every other holder of mortgage backed assets from YOUR pockets.

First, the US tax payer got screwed from the housing implosion, declining credit markets, and rising inflation. Now it will be the tax payer that, once again, gets hit for the damage.  Mr. Paulson desires to protect foreign bond holders and sovereign wealth funds.  Unfortunately, WE are the last in the food chain to reap any rewards from today’s massive and historic bailout of Fannie Mae (FNM) and Freddie Mac (FRE).

There are those who believe that this bailout will be the mark of a bottom, not just in the equities market, but in the housing market.  I guess that theory must be based on rising unemployment, massive consumer debt, increasing loan defaults, and falling retail sales.

Preventing a total collapse of the GSE’s changes nothing.  But, it may be hours or days before we see the real reaction in the equities market.  This bailout of the GSE’s does not change the underlying fundamental mess of the economy.  It remains to be seen if this will make loans more available to people for mortgages. The losses stemming from asset-backed securities has been enormous, in the hundreds of billions, this is “capital” that has vanished in a puff of smoke.  Nothing brings that back. Now it will be the tax payer who will have to front the money to ‘bail out’ those who stood to lose the most.

What will happen going forward? Will the added risk being placed upon the US Treasury create a ‘lack of confidence’ in the US economic system, thus sending the value of the dollar down further? Will commodity prices begin to ramp upwards again as well? And what about equities? Those who believe this marks a bottom in the markets will certainly be buying. But, those who view today’s actions as nothing more than a desperate measure to prop up the markets will be selling any resulting rally. In some ways today’s bailout may also signal that conditions have become so terribly bad that an imminent collapse of the markets was at hand.

There will be many differing opinions, spins, and commentaries on this historic event today. This will certainly be one wild week. Our long term outlook for the equities market remains as it has been for 13 months now, down.

The short term is going to be crazy and I am going to watch from the sidelines for now until clear signs reveal themselves.

Posted in Categories: Contributor, Economy, External Research, Stocks, USA.

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