More about the financial crisis

I wrote yesterday about the enduring reality of the financial and economic crisis confronting us. Today brings more reports, confirming that my earlier article was pretty much on the money (you should pardon the expression).

First, CNN reports that the Fannie Mae & Freddie Mac bailouts might hit $100 billion, or even double that figure. That's your tax money and mine at work, folks . . . A short excerpt:

Since Congress essentially wrote a blank check to the Treasury Department in July 2008 to do what needed to be done to inject capital into the two firms, Fannie (FNM, Fortune 500) has received $34.2 billion of direct government support while Freddie (FRE, Fortune 500) has received $51.7 billion.

. . .

When Congress was debating the bailout of Fannie and Freddie last July, the official estimate from the Congressional Budget Office was that a bailout would most likely cost taxpayers $25 billion, with only a 5% chance of the price tag reaching $100 billion between them.

In addition, both Fannie and Freddie are likely to need billions of dollars more after they report second quarter results in the coming weeks. Experts believe the cost will only continue to rise in the next year.

"We're assuming they each will cross the $100 billion mark fairly soon. They could be hitting the $200 billion barrier by the end of next year," said Bose George, mortgage analyst at Keefe, Bruyette & Woods, an investment bank specializing in financial services firms.

. . .

Both the Bush administration and the Obama administration have used government control of Fannie and Freddie to implement various policies to try to address rising home foreclosures and falling prices. The firms are a key part of the Obama administration's efforts to refinance mortgages of at-risk home owners, in some cases making loans for up to 125% of the home's current market value.

"The way to think of the cost is not as a loan," said Phillip Swagel, a professor at Georgetown's business school who was the assistant secretary for economic policy in the final months of the Bush administration. "It's really a way of spending taxpayer money for policy purposes."

There's more at the link.

The gloomy, but realistic Ambrose Evans-Pritchard, writing in the Daily Telegraph in London, warns that the Western world faces the possibility of fiscal ruin. Europe, it seems, is in an even worse mess than the USA, financially speaking. A few excerpts:

Britain, Spain, France, Germany, Italy, the US, and Japan are in varying states of fiscal ruin, and those tipping into demographic decline (unlike young Ireland) have an underlying cancer that is even more deadly. The West cannot support its gold-plated state structures from an aging workforce and depleted tax base.

As the International Monetary Fund made clear last week, Britain is lucky that markets have not yet imposed a "penalty interest" on British Gilts, given the trajectory of UK national debt – now vaulting towards 100pc of GDP – and the scandalous refusal of this Government to map out any path back to solvency.

"The UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market. This benefit of the doubt is not going to last forever," said the Fund.

France and Italy have been less abject, but they began with higher borrowing needs. Italy's debt is expected to reach the danger level of 120pc next year, according to leaked Treasury documents. France's debt will near 90pc next year if President Nicolas Sarkozy goes ahead with his "Grand Emprunt", a fiscal blitz masquerading as investment.

There was a case for an emergency boost last winter to cushion the blow as global industry crashed. That moment has passed. While I agree with Nomura's Richard Koo that the US, Britain, and Europe risk a deflationary slump along the lines of Japan's Lost Decade (two decades really), I am ever more wary of his calls for Keynesian spending a l'outrance.

Such policies have crippled Japan. A string of make-work stimulus plans - famously building bridges to nowhere in Hokkaido - has ensured that the day of reckoning will be worse, when it comes. The IMF says Japan's gross public debt will reach 240pc of GDP by 2014 - beyond the point of recovery for a nation with a contracting workforce. Sooner or later, Japan's bond market will blow up.

. . .

The imperative for the debt-bloated West is to cut spending systematically for year after year, off-setting the deflationary effect with monetary stimulus. This is the only mix that can save us.

My awful fear is that we will do exactly the opposite, incubating yet another crisis this autumn, to which we will respond with yet further spending. This is the road to ruin.

There's more at the link.

Sobering reading - and a warning to all of us to 'duck and cover', financially speaking. This is no time to be taking speculative risks or getting deeper into debt! I think we should also be hammering our elected representatives, demanding that they cease pouring our tax dollars down a black hole with no return in prospect. Not only are they beggaring us, but our children and our children's children will still be paying off the debts we incur. They'll loathe us for that - and with good reason.

Peter