Determining that Government is Too Big to Fail, Government Takes Over Government

The struggling mortgage-purchasing giants, Fannie Mae and Freddie Mac, have been placed in a financial "conservatorship," the maximally-stressed out Secretary of the Treasury Henry Paulson announced on Sunday. A conservatorship is the sort of legal vehicle you might consider for your failing Aunt Tilly when she acquires the distressing habit of dispensing thousand dollar checks to complete strangers. The gummed-up lending market in the United States is in desperate need of some fiscal WD-40, and so the Treasury Department, as in the case of Bear Stearns, is riding to the rescue with its usual implement of resuscitation, more money. Where does all the money come from? From the usual source: the printing press at the Treasury Department.

The problem, in a way, gets simpler and simpler as we go. The United States does not actually have any "money," as we used to understand the term. I am not talking about going off the gold standard, as Nixon decided to do a long time ago when we moved to the present system of "fiat currency." What we have is an international agreement among the nations of the world that the dollar, for now, is the agreed marker for how much money is available in the world. Most commodities, most notably oil, are denominated in dollars. This is one of the major reasons, in fact, that the price of oil moves inversely to the value of the dollar. The lower price of gasoline at present reflects a relative "strengthening" of the dollar against foreign currencies, but in part this is because the economic woes of the United States are dragging the rest of the world down with it, and all of this is particularly attributable to the flagging fortunes of that mightiest of all econ-drivers, the American Consumer.

To keep the consumer economy going in the first eight years of this millenium, the U.S. came up with a brilliant scheme for breathing new life into its profligate consumption. The hard assets, primarily the housing stock of America, were used as collateral for recycled dollars collected from around the world and the money thus raised was used to keep the consumer economy going despite the declining wages of the American worker. The collateral instruments, the mortgages, were sold in the secondary market to numerous purchasers, but especially to Fannie & Freddie who together are involved in about 70% of the secondary mortgage market in the United States. F&F bundled the mortgages into mortgage backed securities (MBS) and sold them domestically and around the world.

While Fannie & Freddie are only "quasi" public entities, the quasi-CEOs of these outfits were not reticent about assuring foreign purchasers that MBS bonds purchased, inter alia, by the Chinese, Japanese, Cayman Islanders and others were really, when you think about it, a whole lot like Treasury bonds issued by the Unites States government, except, you know, they're not. In reliance on this fraud, our most important creditors went all in for this toxic crud. And so, when it came to pass that a great number of the MBS bonds were collateralized by houses whose former owners now live in tent cities in Ontario, California and other scenic locales, the international merde hit the ventilateur.

Henry Paulson's anal pucker factor, which had been hovering around 9.7 (10 is slammed completely shut) suddenly leapt to an untenable 9.9. We have relied for a very long time on the kindness of strangers, and if those foreign creditors, who hold about $1.3 trillion worth of the MBS (Mortgaged Bullshit), were to suddenly cast a gimlet eye on the Treasury securities they also hold, and were to logically decide that a country which runs half-trillion dollar yearly deficits, and which owes itself and others $10 trillion, and borrows money in order to buy oil and fund wars of aggression to ensure access to oil, might not be actually good for all that U.S. paper they were holding; well, it could start to sound something like this:

"Our new Chinese creditors have demanded their first payment. Several times in the last week, Chinese officials have stated in no unceertain terms that they would be VERY UNHAPPY if their Fannie and Freddie bonds weren't honored in full. Forget the Fed: US economic conditions are now dictated by the People's Bank of China." From Economic Populist.

What form might this unhappiness take? It might take the form of economic catastrophe for the United States if it dispelled the group hallucination on which American prosperity now depends; to wit, the consensus delusion that running our printing press entitles us to determine how wealthy we are. So Paulson really had no choice. It was obvious the "drunk" (Bush's term) execs at Fannie & Fred had managed the companies off a cliff, but their demise spelled huge trouble for the government's own viability. So, yet another no-brainer for Paulson. The Feds are calling the shots from here on out, with the "taxpayers" left to inject whatever operating capital the GSEs will need to service their foreign and other debts.

Of course, the idea of the "taxpayers" actually paying for this latest emergency relief is yet another fantasy. The Feds may as well pile on as much debt as they can get away with at this point, because the truth is we're not good for any of it. The taxpayers don't have that kind of money. The idea of enforcing some sort of financial discipline through the principle of "moral hazard" disappeared about the time that Clinton's Treasury Secretary, Robert Rubin, engineered the bailout of Long-Term Capital Management. It's now standard operating procedure for the federal government to take over one huge financial company after another, as we gradually socialize the financial structure of the United States. It is the natural, inescapable action-reaction sequence after all the years of mindless, Ayn Rand-inspired, deregulated greed. But really, Paulson is just kicking the problem down the road. If you don't have the money, you don't have the money. He's staving off the inevitable until, let's see, about November 5, 2008.

Which might be the biggest, ironical joke of all. Paulson might help McCain get elected, and then this addled, goofy, querulous, forgetful shmegege can inherit the job of straightening out - what would you call it? - the financial meltdown of the United States economy. It would almost be worth it just to see that.