The Federal Reserve Crosses the Rubicon

US taxpayers to increase their stake in the 2008 banking industry meltdown

As the world economy continues its inexorable slide into recession, we receive news this morning which, once the situation plays out, will likely make the March 2008 Bear Sterns bailout look like small potatoes. In this connection, we'll spotlight a couple of news items from bloomberg.com this morning.

First, from Paulson Puts Treasury's Weight Behind Fannie, Freddie:

July 14 (Bloomberg) -- Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.
Paulson, speaking yesterday on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in the companies and lend to them, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank. Fannie and Freddie shares rose in New York trading.
The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that's been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs.
"They appear to be crossing the Rubicon," Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar's invasion of Rome to set up a dictatorship.

Next, we get something from commodities investment hawk Jim Rogers: Fannie Mae, Freddie Rescue a `Disaster,' Rogers Says:

July 14 (Bloomberg) -- The U.S. Treasury Department's plan to shore up Fannie Mae and Freddie Mac is an "unmitigated disaster'' and the largest U.S. mortgage lenders are "basically insolvent,'' according to investor Jim Rogers.
Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson's request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Goldman Sachs Group Inc. analyst Daniel Zimmerman predicted the mortgage finance companies' shares may fall another 35 percent.
"I don't know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,'' Rogers, 65, said in an interview from Singapore. "So we're going to bail out everybody else in the world. And it ruins the Federal Reserve's balance sheet and it makes the dollar more vulnerable and it increases inflation.''
The chairman of Rogers Holdings, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, also said the commodities bull market has a "long way to go'' and advised buying agricultural commodities. [...]
"These companies were going to go bankrupt if they hadn't stepped in to do something, and they should've gone bankrupt with all of the mistakes they've made,'' Rogers said. "What's going to happen when you Band-Aid and put some Band-Aids on it for another year or two or three? What's going to happen three years from now when the situation's much, much, much worse?'' [...]
The U.S. economy is in a recession, possibly the worst since World War II, Rogers said.
"They're ruining what has been one of the greatest economies in the world,'' Rogers said. Bernanke and Paulson "are bailing out their friends on Wall Street but there are 300 million Americans that are going to have to pay for this."

US taxpayers can surely thank their lucky stars that the kindly folks at the FED and the US Treasury Department have the foresight to rescue the banking industry from the results of their own recklessness and perfidy. And as continuing infusions of hundreds of billions of US dollars continue to stream into our already inflationary economy, and the purchasing power of the our currency continues to descend into the realm of "play money," remember... they're doing it all for us.

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