Freddie and Fannie

Oh boy. I just owe another hundred billion dollars. And so do you – and you. Our beloved Uncle Sam has just taken over FannieMae and FreddieMac. He estimates that the minimum cost to you and me will be about one third the cost of World War II in non-inflation adjusted dollars. One hundred billion is a large number. How many of us can really grasp it?
Why did Uncle wish such grief on us? Because, he points out, the alternative is simply unthinkable. Fannie and Freddie, between them, hold or guarantee about one half of all American mortgages. (That’s another easily comprehensible figure: Five trillion dollars.) Should, God forbid, that all go to smash, we might just be sucked down the economic drain for a long, long time.
When Jack Kennedy said, “We will shoulder any burden; we will fight any foe”, did he really have this kind of burden in mind? We will likely carry it until the American Empire finally lies on the ash heap of history with Rome, Spain, Persia, Britain and Babylon. What frustrates is that It’s a burden of our own making.
What were we thinking? In the past five years, a developer has slapped up a sixty house development in the woods across the street from me. “Starter homes” Very young couples. Fifteen hundred to 2600 sq feet, loaded with amenities. Many of them sold for zero down and a very low rate adjustable mortgage.
That’s the sort of development Fannie or Freddie bought or guaranteed over the past five years. Those are the kind of bad bets making American banks sell themselves to Arab buyers. As the Arabs stop buying – they’ve reached the worry point – those banks are now being forced to unload gilt edged assets at fire sale prices. The buyers? Investors known interestingly enough as “vultures”.
We didn’t see this coming? A few years ago a friend of mine took a ride through another new development with a real estate agent who had sold many of the homes. “Notice that the blinds are down in most of them,” said the agent.
“Why?’ asked my friend.
“Because after they got in these houses, none of them could afford to buy living room furniture,” explained the agent.
Any sane person would have said that this kind of speculation (and it is speculation, even if you live in one of those houses) cannot go on. It eventually has to topple over of its own weight. Silver did in 1873. Western land purchases did in 1891, stocks did in 1929, savings and loans in the 1980s, high tech in 2001 and, now, real estate. (Let’s not forget Dutch tulips a few centuries ago.)
So how did we delude ourselves once again?
As investors, we’ve always been a nation of binge drinkers. (We’re by no means the only one.) Once we get a little drunk on “appreciation” or “profit”, we can’t stop. Either “appreciation” is the strongest liquor in the world or we have no more resistance to it than the Native Americans had to alcohol. This binge may really give us a hangover.
So what does a binge drinker do to stop injuring himself. Swear off the sauce (the markets)? Go back to letting companies invest our pensions for us? Master the art of temperance, accepting that huge returns in markets or homes are not guaranteed? Cut back on our whole lifestyle?
We should look at our history – and the mess we’re in now – and at least think about it. General Grant, an actual alcoholic kept an officer around to make sure Grant didn’t drink. Is there something comparable we could do with real estate and stock market bubbles?
I advise that we do some soul searching.
At least until we’ve paid off our date with Fanny and Freddie.