WC Varones

Don't lend your hand to raise no flag atop no ship of fools

Debauchery of Currency via Unlimited Backstopping of Fannie & Freddie

Yes, Treasury gave Freddie and Fannie a 3 year long unlimited backstop just before Christmas. You all were paying attention at that time, right? Who doesn't love a good Christmas Eve Treasury Department Press Release hung by the chimney with care?

Some insight on the numbers involved, the very specific reasons why the author believes that action was unconstitutional, and a good deal of criticism of the Fed and Treasury, can be read at Hussman Funds. Here are 2 paragraphs from the article titled:

Timothy Geithner Meets Vladimir Lenin

This policy is likely to lead to far more delinquencies. Whether it will lead to far more foreclosures depends on the nations' capacity and willingness to shoulder multiple insolvencies in order to protect bondholders, mortgage our national wealth to China and other large purchasers of U.S. Treasuries, or alternatively, massively inflate away the dollar value of the underlying loans. The much-vaunted TARP money that has “profitably” come back to the Treasury is a tiny sliver of what has been committed to defend the private bondholders of financial institutions from losses. Either the debt we create to save these bondholders will stand as a claim on our future national production and a diversion of our ability to spend public resources for the benefit of the public, or we must inflate it away. There is no third option. This does not deserve legislative discussion?

What is likely, in my view, is that we will observe far greater issuance of government liabilities, which will predictably create a near doubling of the consumer price index in the coming decade (though probably not for a few years due to credit concerns, which dampen monetary velocity). It is notable that the massive expansion of government liabilities beginning in the late-1960's eventually exploded into uncontrollable inflation by the late 1970's. There are lags between the creation of government liabilities and their inflationary effects. But to expand these liabilities as recklessly as the Fed and Treasury are now doing is to undermine the long-term foundations of the economy.

HT: HussmanFunds.com via Catherin Austin Fitt's Solari.com

Addendum: W.C. here. I'd encourage everyone to read the full Hussman piece as it has important insights on the inflation/deflation debate that so fascinates me. Hussman reinforces my view, and the views of others like Michael Panzner, that we will have a dollar collapse a few years out:
What is likely, in my view, is that we will observe far greater issuance of government liabilities, which will predictably create a near doubling of the consumer price index in the coming decade (though probably not for a few years due to credit concerns, which dampen monetary velocity). It is notable that the massive expansion of government liabilities beginning in the late-1960's eventually exploded into uncontrollable inflation by the late 1970's. There are lags between the creation of government liabilities and their inflationary effects. But to expand these liabilities as recklessly as the Fed and Treasury are now doing is to undermine the long-term foundations of the economy.

It is commonly argued that we cannot observe inflation with unemployment so high. In my view, this is a misinterpretation of A.W. Phillips (1958) analysis. While the famed "Phillips Curve" was described as a relationship between (nominal) "money" wages and unemployment, the British data Phillips used was from a period when Britain was on the gold standard, and the general price level was extremely stable. Thus, any wage inflation observed by Phillips was actually real wage inflation. The Phillips Curve is simply a standard economic argument about relative scarcity. It says that when the labor markets are tight, nominal wages rise faster than the rate of general inflation (i.e. real wages rise), and when unemployment is high, nominal wages rise slower than the rate of general inflation (i.e. real wages fall). As we observed in the 1970's, high unemployment can exist in concert with high rates of inflation. All that happens, in that case, is that wages tend to rise slower than prices. Assuming labor productivity is growing as well, real wages don't keep pace with productivity growth. In any event, unemployment emphatically does not prevent the inflationary consequences of reckless creation of government liabilities.

2 comments:

B-Daddy said...

WC,
Thanks for keeping this in the public eye. I agree that Treasury's action was both unconstitutional and unlawful. This crap drives me up the wall. When the Bush administration granted itself authority that was clearly extra-legal, the left correctly howled, and a number of their actions were slapped down by the Supremes. But now, we have not just extra-legal (outside of authorized law) but illegal (contrary to written law) activity and hardly a peep. Further, this illegal granting of unlimited access to credit will have much farther reaching impact on the nation than wiretapping, rendition or military tribunals. Disgusting.

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