Government has taken over the GSE’s

September 7, 2008

So the inevitable has happened. The government has taken Fannie Mae and Freddie Mac into conservatorship. It’s in essence an acknowledgement that they’re bankrupt. They had no other option, and at least the uncertainty surrounding this particular matter has lessened.

 

The real issue here is that this has been caused by Bill Gross. If the US government doesn’t have as much as credibility as the head of PIMCO, it’s hard to predict where this crisis will end.

 

The bailout means less mortgage credit, and less housing activity. While in the short run the Treasury may get away with low interest as result of panicky financial markets, in the long run this will cause more taxes. Or of course, if the politicians decide so, it may mean less taxes, but lower dollar. And if they decide to do nothing, it may as well bring about bankruptcy of the US.

 

I believe that the dollar will be the victim.

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