Give capitalism a chance...
Last night, we attended a birthday party for our old friend, Lord Rees-Mogg. Tout London was there – Maggie Thatcher and David Cameron, for example.
We had heard that Mrs. Thatcher had been unwell; but she looked spry...even sturdy. It was not the occasion to ask a serious question...but we wondered how she must feel. She, along with Ronald Reagan, did so much to set capitalism free. But now, it is being put back in a cage...
All the world’s major markets are in major declines. The worst hit so far are those in the Far East – which are falling again this morning. Among the Asian markets, only Vietnam seems to be on the mend. European markets are down 20%-25%. But Shanghai has lost 40%...and Vietnam has been trimmed more than 50%.
Not much action in the U.S. stock market yesterday. Fannie and Freddie kept treading water, with their heads barely above the waves. Oil stayed at $145.
“U.S. action on lenders calms tense markets,” says a headline on the International Herald Tribune. “Rescue of Fannie Mae and Freddie Mac has ripples around the globe.”
The Financial Times saw the situation differently: “US banks suffer as bail-out fails to calm nerves,” begins the cover story.
And that interpretation would be closest to the truth...at the open of the U.S. markets today, the Dow is down triple-digits.
“The Fed stepped in and tried to bail out Fannie Mae and Freddie Mac, but talk continued to circulate that there would be nothing left. Add the FDIC takeover of IndyMac and the focus of the market shifted to who would be the next to fold,” said Marc Pado, U.S. market strategist at Cantor Fitzgerald.
Despite the rescue of Fannie and Freddie, U.S. banks, such as Washington Mutual and Cleveland’s National City, are in full retreat following the collapse of IndyMac. WaMu went down 35%...National City plunged 27%.
And where’s that strong dollar that Bernanke and Paulson were talking about? It was supposed to go up...after U.S. officials announced a change of policy. Henceforth, the feds were going to fight inflation, remember? Henry Paulson said a strong dollar was in America’s interest...and that there would be no more hanky panky going on with the greenback. Honest. Cross my heart and hope to die.
Today, the dollar continues to slide. The euro briefly hit a record against the U.S. dollar before falling back below $1.60. And yesterday, gold rose another 13 bucks, bringing it back to $973.
“God, guns and gold,” we explained to our French friends over the weekend, “are the three core values to a real American.”
Of course, we went on to explain that there weren’t many real Americans left. Most of them died with Eisenhower...or before. But that’s a long story.
We will try to stay “on message” this morning. But how can we? Everywhere we look, there are so many delicious distractions...so many exquisite ironies...so many feet in so many mouths. How can we help but laugh?
So we’re laughing at Henry Paulson today. As soon as the man is under a little pressure, he buckles to the forces of modern mobocratic government. It was all very well for the nation’s two biggest mortgage finance companies to be part of the ‘free enterprise’ sector – when the wind was at their backs. Fannie and Freddie were just important parts of the financial sector. They helped “allocate credit” to people who needed it. Mongering credit was good work since the ’80s. Since 2002, it was especially good work – up until about a year ago. So who could begrudge Daniel Mudd’s $13.4 million 2007 pay package as CEO of Fannie Mae? Or, who would be sour enough to complain about Dick Syron’s $18.3 million wage from Freddie Mac? These guys were just getting rewarded for good performance, right?
Well, not exactly. Syron’s pay went up 25% last year – even as the company went from a $2.3 billion profit in 2006 to a $3 billion loss in ’07. And Mr. Mudd got a 7% increase, while the company posted a $2.1 billion loss and shareholders took a 33% haircut.
Okay...so maybe shareholders overpaid them a little. But that’s how compensation works in the free market; you get what you can get away with. So, bravo to them! Besides, they were helping the whole great machinery of capitalism make Americans rich. That’s why they gave out all those rich consulting contracts to former members of Congress. And that’s why they spent millions on lobbyists...angling the politicians to protect the mortgage market at all costs.
But what’s this? The wind has whipped around, and now blows a gale into the twin lenders’ faces. Now, we discover that these were “government sponsored enterprises” all along. They were part of America’s social welfare system, it turns out, not part of the free market. They were just performing a public service – helping make sure the poor plebes had roofs over their heads. And now that the two GSEs are having trouble, naturally, the full faith and credit of the United States of America has to be lined up to support them.
“Paulson Puts Treasury’s Weight Behind Fannie, Freddie,” says Bloomberg.
Everywhere we look, we see more evidence that post-Reagan Republicans and post-Thatcher Tories have given up on free enterprise. They have decided that the problems in the economy are too important to be left to business and Wall Street. Congress needs to intervene, say the meddlers, in order to guarantee the nation a smoothly-functioning financial system.
Everyone seems to feel the same way...the free marketers have had their chance. Now, it’s time for a little “adult supervision.” But adult supervision in this context – putting politicians in charge of the economy – is like adult entertainment; it is a salacious fantasy.
And so, it is all happening as we expected...and as we predicted in these pages. What can we do now, but buckle our seat belts...and prepare to enjoy the show? Well, you could try to make a little money...while everyone else is being swept away in the flood of failing financials.
As if the pretensions and conceits of the financial industry weren’t comic enough...we’re now going to see a hilarious farce. The same people who set up a government sponsored enterprise to jack up the mortgage market...and created the biggest housing bubble the world has ever seen...now come to the rescue when the bubble pops.
How, exactly, are they going to rescue America’s mortgage industry? Henry Paulson says they’re going to lend more money to Fannie and Freddie. And he wants the feds to buy their stock too. That should do it. Fannie and Freddie, in their heyday, put their hands on 80% of all the new mortgages in the entire country. Now, they have a book of business that includes more than $5 trillion in liabilities – an amount equal to about half the outstanding mortgages in the country...and a third of the nation’s total GDP.
In other words, Fannie and Freddie are probably the two most important businesses in the consumer economy. Now, nearly three decades after the Reagan Revolution, they will be nationalized. Is that progress...or what?
*** CNN reports that U.S. pension plans have lost about $280 billion.
“Since the credit crunch hit last fall, pension plans funded by S&P 1500 companies have lost about $280 billion in assets, according to an actuary at Mercer, a human resources consulting firm.
“On paper, the losses from last October tally $160 billion. However, according to Mercer actuary Adrian Hartshorn, the asset losses are closer to $280 billion when pension plan assets and liabilities are considered together. The assets, which totaled roughly $1.7 trillion at the end of October 2007, fell by 17%, leaving about $1.4 trillion in assets at the end of June.
“Companies should be concerned, he said, because – assuming no change in the market – a typical U.S. company can expect their pension expenses to increase between 20% and 30% in 2009. That's due to the higher cost of servicing the pension plan's debt and the smaller return from the plan's assets.”
*** “The only things worth owning right now are the financials...and gold,” said a fund manager last night. “I think gold is only about half way to where it is going. And the financials – some of them – are so cheap that you can’t go too far wrong. We’re looking at major banks paying a dividend over 10%. These kind of opportunities don’t come along very often.
“Of course, you have to be prepared for a lot of bad news. We’re going to see more bankruptcies. We’re going to see more markdowns...and more panics...
“But if you’re a value investor...or, I guess I should say, if you’re a young value investor with plenty of time ahead of you...the banks look like good buys.”
Bill Bonner
The Daily Reckoning Australia
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Related Articles:
- Fannie and Freddie in a Free Market Economy
- Fannie and Freddie Say Goodbye to Veto
- What’s Going to Happen to the Mortgage Twins – Fannie and Freddie
- Fannie and Freddie are Finito
- The Disturbing Facts About Paulson, Fannie, Freddie and Friends
About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Comment by justin on 17 July 2008:
Wasn't Reagan big into deficit spending, a.k.a pump priming? Doesn't seem all that 'free market' to me.
Comment by sbenard on 17 July 2008:
justin,
I don't know how old you are, but you seem to ask a sincere question, and a good one. Perhaps you are someone young who doesn't remember the Reagan Presidency, but who has heard some things about "Reagan deficits"? I'm just guessing, but your question seems to suggest this possibility.
I recall that Reagan begged and pleaded constantly with Congress to reduce or at least limit spending, threatening at times to veto budget bills, which he did at times (but in my opinion, not often enough). Congress, and especially Speaker of the House Tip O'Neil, largely ignored him and refused to cut spending. Reagan was practical enough to know that if he refused to play with the Democrat-controlled Congress, he would get nothing. So he compromised. I consider that to be a mistake, but who knows?
George W. Bush, on the other hand, had a different attitude from day one. Before he was elected, in Jan. 2000 during the New Hampshire primaries, he criticized the Republican Party for its traditional stand on limited government (ie., economic responsibility). This was a completely different attitude from Reagan. This new attitude has been stated by Vice President Dick Cheney with the mantra attributed to him that "deficits don't matter". George Bush, unlike Reagan, had both a Republican House and Senate, and yet they exploded the deficits as if they "didn't matter". In my mind, this was inexcusable. But that's the difference.
During the Reagan Presidency, for every presidential signing of a budget, it required literally dozens of Democrats to vote for those same budget deficits. DOZENS of Democrats! Yet today, these same Democrats who voted for every single one of those deficits try to spin history and refer to them as "Reagan deficits". I can only think of one word to describe this phenomenon: hypocrisy!
Article 1, Sections 7.1 and 8.2 of the U.S. Constitution explicitly state that spending, revenues, and debts of the U.S. government are the responsibility of the Congress, NOT the President. Congress is ultimately responsible for the budget, and thus, budget deficits. The Constitution lays responsibility for budgets -- and their deficits -- where they belong, at the feet of the U.S. Congress. This responsibility applies equally to Republicans (during the Bush Presidency) and Democrats (during the Reagan Presidency). Both Parties are, I believe, equally to blame!