There are no atheists in foxholes. And no conservatives when there are subsidies.
Treasury’s takeover of Fannie and Freddie is the greatest socialization of risk since the Chrysler bailout of the ‘70s. By guaranteeing the bonds, the Feds have told every risk-averse investor that he’s a sap for worrying about credit. To paraphrase the Nike ad, just buy it.
But we’ve seen this movie before, and it doesn’t end well. To bail out the Agencies, Treasury will just issue debt and inject cash. The resulting cash infusion into the economy should result in more dollars chasing fewer goods. Milton what’s-his-name had a name for this: inflation.
But allowing Fred and Fan to fail would result in a deflationary spiral of bank insolvencies and a contracting economy. Even the sainted Alan Greenspan can’t think of a better alternative.
If Treasury walks the tightrope and serves up a Goldilocks porridge of just-right cash for Fan and Fred, they deserve one of those gold medals from Beijing. Because the too-cold/too-hot alternatives are Japanese stagnation or Zimbabwean inflation.
Douglas R. Tengdin, CFA
Chief Investment Officer
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