The U.S. government announced plans to place the two mortgage giants, Fannie Mae and Freddie Mac, under “conservatorship” (aka as bankruptcy), the most sweeping government intervention into the financial markets in American history. If these two companies are nationalized, it will add $5.3 trillion dollars to the nation's balance sheet. (And considering the $5.3 trillion in mortgages that Fannie-Freddie own or guarantee, the impact is actually thirteen times greater than the Bear Stearns' failure)
When the U.S. military spends money abroad to fight the New Cold War, these dollars are recycled increasingly into U.S. mortgage-backed securities, because there is no other market large enough to absorb the sums involved. The central banks of China, Japan and Korea are major holders of these securities. Remember, we do not permit foreigners – especially Asians – to buy high-tech, “national security” or key infrastructure.
The Treasury therefore has given informal assurances to foreign governments that they will guarantee at least the dollar value of the money their central banks are recycling. A failure to provide investment guarantees to foreigners would thwart the continuation of U.S. overseas military spending.
The best that this weekend’s bailout can do is to postpone the losses on bad mortgage debts. But this is a far cry from actually restoring the ability of debtors to pay. It is pure hypocrisy for Wall Street’s Hank Paulson to claim that all this is being done to “help home owners.” They are vehicles off whom to make money, not the beneficiaries. They are at the bottom of an increasingly carnivorous and extractive financial food chain.
[Excerpt of interview with Michael Hudson, former Wall Street economist]