Fannie Mae saving source of Inflation. The culprits behind credit, inflation
risks
by Terence Corcoran, found at Financial
Post Published: Wednesday, July 16, 2008
Two major related threats loom over the world economy: credit crises and
rising inflation. What do these two menaces have in common? Bankers, hedge-fund
managers, speculators and capitalism in general have been taking the hit for the
economic turmoil, both for credit risk and inflation. But the looming collapse
of Fannie Mae and Freddie Macin the United States should help change the focus a
little. We are now getting down to the heart of the matter, which turns out not
to be rampant capitalism but out of control back-door socialism.
The
headquarters of mortgage lender Fannie Mae is shown in Washington in this file
photo from October 3, 2006. REUTERS/Jason Reed/Files
There is nothing free market about the two American mortgage backers, hybrid
institutions created by the U.S. government to support mortgages and make home
buying easier and more affordable for Americans. Fannie Mae and Freddie Mac,
prodded by Congress and regulators, socialized trillions of dollars of mortgage
risk on the backs of U. S. taxpayers. Along with dozens of other U. S.
government programs that lured American's into a home-buying frenzy, the two
institutions -- now getting even more socialist backing from Washington -- stand
among the leading creators of the U. S. mortgage and credit crisis.
In Washington, Moral Hazard is a dead country singer. Governments and
investors around the world put money in Fannie Mae and Freddie Macsecurities,
knowing that if disaster struck Washington would bail them out. And so it has,
the bailout reaching absurd levels yesterday when two branches of Washington
power, the Securities and Exchange Commission and U. S. Treasury Secretary Henry
Paulson, moved to protect Fan and Fred shareholders.
At the SEC, Christopher Cox banned short-sellers from trading in Fannie Mae
and Freddie Mac, allegedly to protect their shares against predatory
speculators. Such sales carry the pejorative "naked short selling"
label, handing the SEC an easy excuse to introduce a market-wide ban on a
legitimate practice. At the same time, Mr. Paulson announced that he wanted
unlimited authority to buy shares in the two failing government companies. Will
U. S. taxpayers fall for this double-barrelled assault on their pocket books and
on the rights of investors?
The U. S. government is now preventing legitimate trading in shares of
government-backed corporations, keeping those shares up so that the government
can buy at higher prices. While crazy, it still didn't work. Fannie Mae and
Freddie Macshares still fell another 25% yesterday.
The U. S. Federal Reserve is joining the Treasury in backing what looks like
a government takeover of the mortgage-backing industry. If there's an upside to
such a development, it is the hope -- expressed by the Cato Institute's Gerald
O'Driscoll elsewhere on this page -- that any takeover will be followed by
privatization and dismemberment.
---
Another development that should take the heat off private institutions is the
looming inflation risk sweeping through the Canadian and U. S. economies.
Politicians and regulators get a lot of mileage blaming everything on
speculators and the markets, but we are surely long past the time when
generalized economy-wide inflation -- which now threatens the world -- can be
pinned on anybody but central bankers and, indirectly, on governments
The Bank of Canada, in announcing no change in a key interest rate yesterday,
warned that inflation could shoot up to 4% within the next 12 months, way above
its target range. Only six months ago, the bank was projecting inflation would
be lower. In January, it said the inflation risk was "balanced,"
meaning at the time that "inflation should fall below 1.5% by the middle of
this year before returning to the 2% target by the end of 2009." So
confident was the bank that inflation wasn't a problem that it dropped its key
overnight interest rate by a quarter point to 4%.
Another big half-point cut in the rate came in March, when the bank said the
risk of inflation "has clearly shifted to the downside." The bank went
at it again in April (only three months ago), dropping the rate to 3% and even
adding that it might need "further economic stimulous" to stop the
inflation rate from falling.
Now the Bank of Canada, suddenly alert to a hot inflation environment and
warning of 4%, has decided to at least stop cutting interest rates. To what
degree did the bank's earlier rate cuts and pronouncements create the
inflationary risk we now face? Don't look to the bank for the answer to that
question in tomorrow's regular Monetary Policy Review.
The culprit is oil prices, the bank will say. And while it won't name
speculators, it will do nothing to suggest otherwise, namely that the global oil
price rocket has actually been largely fuelled by central bankers who failed to
prevent inflation. Not a speculator in sight.
It would be some paradox if central banks and their governments, having
created a financial crises through their monopoly control over money, should now
use that crisis to expand their power.
