disclaimer: this post involves conjecture and conspiracy theory – the poster has been called ‘whacko’ by at least one blog reader – readers are advised to put on their foil hats before continuing

Fannie and Freddie came up in another thread – I have read some material proposing that the Fed is using these organizations to directly monetize the failing housing industry

Here are some interesting data points to consider:

> in essence, Fannie and Freddie both died about three or four years ago – they suffered some undisclosed amount of losses from derivatives and have yet to bring their accounting records up to date – there was some scandal and shakeup of management – if I remember correctly, the publicly acknowledged losses so far have been several billion but less than $10B – here’s Freddie reporting another $1.2B loss on derivatives in June of this year (http://www.marketwatch.com/news/story/losses-derivatives-hit-freddie-macs/story.aspx?guid=%7BC66023B0-0B0C-48C5-81ED-BECCF5C15862%7D)

> Fed stopped publishing M-3 monetary growth rate figures in March of 2005 – several private economists have been tracking the M-3 metric based on other publicly available data – they show M-3 growth currently around 13.7% (http://www.nowandfutures.com/images/m3b_long_term.png)

> one of the ways for a central bank to stave off credit contraction and deflation is to directly monetize paper assets – in simplified terms this means using printing press money to buy worthless paper assets instead of letting those assets meet the price discovery process in an open market – it is best if this monetization process is hidden from the public because maintaining the public’s CONfidence is the bank’s ultimate objective – Ben Bernanke discussed some of the options the central bank has available to them in Nov of 2002 – he has since been referred to as ‘Helicopter Ben’ because he made the analogy of dropping $100 dollar bills from helicopters – his speech makes interesting reading inre options the Fed has for fighting credit contraction (http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm)

Here’s where the conjecture comes in: we take the three pieces of information above to arrive at this POSSIBLE conclusion:

the Fed is already directly monetizing failed housing-related investments via Fannie and Freddie

The failure of these GSE organizations allowed their books to be removed from public view – Fannie and Freddie already existed in the market as major buyers of residential mortgages – without public over-sight they could buy any trash that came down the pike and they did so – and they continue to do so today – both of these organizations have continued to show ‘growth’ since their failures – their stocks are doing OK so I guess everything is just fine? (“Pay no attention to that man behind the curtain, Dorothy”)

We can’t prove or dis-prove this theory because the relevant data isn’t available to us – the idea makes sense however – there really isn’t much difference between the Fed using printing press money to buy US Treasury Bonds or to use the same money buying mortgage debt – one piece of paper is as worthless as the other and they are both ultimately backed up by the US taxpayer in one way or another

The financial engineers have built a mountain of paper that is at least $400 trillion in size ($700 trillion is the highest number I have seen) – this paper mountain is built upon the back of an over-valued real estate market and now the investors (idiots?) holding the paper are questioning the value of it

The Fed can’t stop the markets from re-valuing this paper and the Fed can’t run the printing presses fast enough (in private) to buy all the paper as it de-values – buying all the paper publicly would end the CONfidence game that provides the bankers a living

Some of this paper was recently brought to market via the failure of two Bear Stearns hedge funds – since the hedge funds aren’t allowing redemptions, the holders have to sell their positions privately – holders were offering 11 cents on the dollar – buyers were offering 5 cents on the dollar – I haven’t seen any articles indicating that positions traded hands at these prices

We are certainly living in interesting times – I hope you have your eyes open!

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Here’s Ron Paul talking about the housing bubble in 2003 – he points out that the GSEs (Fannie and Freddie) contribute to the over-valuation of real estate markets [Ron Paul is one smart cookie! – Ron Paul in 2008!!!] – how is that Ron Paul could see the housing bubble in 2003 and we still have people denying the existence of the bubble in 2007? Incredible!

Fannie and Freddie
http://www.lewrockwell.com/paul/paul128.html
“Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.”

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This article talks about how the Fed can directly monetize (buy) just about any piece of paper

INFLATION, DEFLATION, AND THE “DOLLAR SHORT”
http://www.financialsense.com/editorials/blumen/2004/0528.html
“The monetization of any asset is similar to the purchase of Treasuries: the Fed buys something and pays the money into existence with a check. Asset monetization has the potential to arrest or head off the debt-default process. As new money is created and deposited in banks, it increases the equity of the banking system, alleviating the deflationary pressures that otherwise would force banks to contract their loan portfolios.
…
In a crisis, the Fed, or agencies set up to act on its behalf (perhaps public, perhaps in secret) with its checkbook in their back pocket, could purchase assets through the capital markets, such as the stock or bond exchanges, or could buy assets directly off the books of the banks.”

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lewrockwell.com publishes many informed articles – here they talk about the GSEs and an alternative scenario under a 100% gold standard

Monetizing Envy and America’s Housing Bubble
http://www.lewrockwell.com/englund/englund13.html

“If the truth be told, this massive bureaucracy of federal and quasi-federal agencies is nothing more than an intellectually-bankrupt monument to political pandering focused on property envy. With the Federal Reserve’s accommodation, this envy can be monetized so that even the poorest credit risk can qualify for a mortgage loan.

… The argument goes that, without government, people would be either homeless or lifetime renters with no prospects for home ownership or even basic shelter. In essence, only the wealthy would own homes. Such intervention actually serves to further mold people into high-time-preference sloths unwilling to work hard and to save in order to buy a home.”
…
“Under a 100% gold standard, a housing bubble would not emerge. In fact, a house would be nothing more than a consumer durable that depreciates over time. Moreover, under a 100% gold standard, the prices of goods and services would decline over time as mild deflation would be a welcome part of everyday life.

Just think of it, the value of savings would increase while housing prices gradually decreased. The free market itself would bring about affordable housing. When planning for home ownership, such virtues as working hard, saving, and thrift would once again emerge in our thought processes. The mere thought of needing government intervention, to make housing affordable, would be laughable. “