Fannie Mae & Freddie Mac...

Some of you out there have heard of these two giants - probably in reference to the last home you purchased (if you even heard about them then) or more recently when the US Government started down the path of bailing out these organizations.

What you may not know is that Both Fannie Mae & Freddie Mac are two of the largest companies in the history of the world (with the possible exception of the East India Trading Co if you can calculate the exchange rates properly). Their combined debt from the failed mortgages that they have is more debt than every other country on the face of the earth (save for the US of A). 10 Trillion Dollars.

These institutions were private sector brokerages - basically they were created in the Great Depression to open up liquidity for banks to loan money for new home purchases. Banks could only lend out money they had and if they had too many mortgages on the books, they were asset rich but not with cash. Fannie Mae would then buy the mortgages from the banks so the banks would then have the cash to lend out for more homes. Hence why they got to be so huge without anyone really knowing it.

They were a pseudo government backed companies that implied that those mortgages purchased by Fannie Mae/Freddie Mac would be covered by the good graces of American tax dollars if they should fail (similar - not quite - but close to the FDIC insurance that each bank has for your deposits).

Well here we are - 80 years later and now we've got a big mess on our hands. Why the government has to step in is that many industrialized nations have invested large sums of their own portfolio of cash assets into these organizations just because they were supposedly backed by the government. China, Great Brittain, and others have some 10% of it's assets tied up in this and if we let them collapse, it would literally send the entire world economy into a freeze - making the Great Depression look pretty small in comparison. So, in effect, our government and our tax dollars have to bail these companies out.

This sucks on many levels - Our debt is huge already and now taking on this debt makes it even worse (thankfully our Gross Domestic Product - GDP isn't tied to our debt!).

What this really signals out to me is that our growth as a nation has been leveraged almost entirely on credit. We have taken loans from our partner nations, we have stretched our collective purchasing power based upon institutions like Fannie Mae who took on more and more risky mortgages because they HAD the backing of the government (no real accountability when the entire company has a golden parachute). All of the way down to our own individual households that have too much credit card debt - paying for past purchases from the potential of future earnings.

The trade deficits don't help us at all. We are importing too many consumables (toys from China, oil from the Saudi's, etc.) and not sending enough back to them to make the "trade" part effective. It's basically like buying 10 items to every one we sell them - if you practiced that in your own spending, you can see that very quickly you don't have the cash to keep that up for very long before you've maxed out any and all available credit lines.

That's where we are now - we're maxed out with a nation sitting on a pile of debt. We are forced to dig deep to get out of this hole - that means that we have to close tax loopholes and everyone will have to pay more in taxes to pony up to pay it off.

Unless America can somehow dig up the next greatest series of innovations that the world will do/pay anything for to posses, then we find ourselves being slaves to the very nations that have lent us the money and we will have truly lost our bargaining at the world table.

We'll have to stand by to see how this one turns out...