Observations On The Ongoing $1.5 Trillion GSE Wealth Transfer
John Hussman shares an interesting perspective on yet another from of intergenerational
wealth transfer (aka theft), this time involving the US (and by
implication its taxpayers), its increasingly unmanageable debt load,
and the resultant preservation of wealth of lenders to the nationalized
GSE complex, which is massively underwater but will never be forced to
be impaired on its holdings, for as long as the current Fed leadership is
in place, and the chimera of "change" continues being just that. The kicker - Congress has no way whatsoever to prevent this
theft from happening. Once again, America's entire legislative
apparatus has been bypassed in order to bail out the reckless lenders
who inflated this whole credit bubble in the first place.
How to spend $1.5 trillion without Congressional approval
Step 1: Federal Reserve purchases $1.5 trillion in Fannie Mae and Freddie Mac securities, creating $1.5 trillion of monetary base to pay for these purchases.
Step 2: U.S. Treasury quietly announces unlimited support for Fannie Mae and Freddie Mac on December 24, 2009, exploiting a loophole in a 2008 law that was originally written to insure a maximum of $300 billion in total mortgage principal (not losses, but principal).
Step 3: Over the next several quarters, the U.S. Treasury issues $1.5 trillion in new Treasury debt to the public, taking in the $1.5 trillion in base money created by the Fed in Step 1.
Step 4: U.S. Treasury hands that $1.5 trillion in proceeds from the new debt issuance to Fannie Mae and Freddie Mac.
Step 5: Fannie Mae and Freddie Mac use the proceeds to redeem the $1.5 trillion in mortgage securities held by the Fed, thus reversing the Fed's transactions in Step 1, without the need for any other "unwinding" transactions (watch). The base money created by the Fed comes back to the Fed, and the mortgage securities purchased by the Fed disappear, by burdening the American public with a new, equivalent obligation in the form of U.S. government debt.
Outcome: The Federal Reserve closes its positions in Fannie Mae and Freddie Mac securities, the quantity of outstanding Fannie Mae and Freddie Mac liabilities declines by $1.5 trillion, thus allowing their remaining assets repay the remaining liabilities without a $1.5 trillion hole of insolvency, and the outstanding quantity of U.S. Treasury debt expands by $1.5 trillion in order to protect the lenders, while ordinary Americans continue to lose their homes and jobs.
Throughout this crisis, the ultimate objective of Bernanke and Geithner has consistently been to protect the bondholders. This objective will not change unless the leadership changes.
While Obama's "War on Wall Street" is progressing with no impact, and will likely stimulate the bankers to merely find new loopholes to extract wealth, the one aspect of financial reform that the Administration should be focusing on, the shadow nationalized balance sheet, that of Fannie and Freddie, keeps getting absolutely no focus. In the grand scheme of things, banker bonuses are merely a tine speck when one considers the massive incremental leverage that America will be saddled with each and every year as ever increasing losses at the institutions that funded the housing bubble, and, consequentially, those lenders that have funded these GSEs, are not only recognized but continue to be funded at par. In essence this is money coming out of America's middle-class pocket and serves to line the pockets of not only domestic funds like PIMCO but all the international lenders who were foolish enough to fund the liability side of the GSEs. Look for absolutely no future reform in this space for many years, as this is the very heart of America's underfunding problem.
Furthermore, unlike Mr. Hussman, we are a little more skeptically inclined on whether America will be able to find the demand to satisfy the surging Treasury surplus.
We urge readers to read today's entire Hussman note, as it highlights various other conflicts of interest, and the ongoing spectacle that is the suggested "reform" which does nothing to change the kleptocratic status quo.