Federal Bail-Outs and the Rest of Us: What Does It Mean?

As I write this, Treasury Secretary Henry M. Paulson’s announcement that the Bush administration will indeed shore up Fannie Mae and Freddie Mac is all over the news and still sinking in. After opening slightly higher Monday morning, Wall Street dipped back into negative territory as analysts attempted to digest the bail-out news.

What can it mean for the average person?

If you’ve been listening to the news, you’ve probably heard that it means that the American taxpayer can expect at some point to carry the brunt of the subprime lending debacle losses. That is, if the Bush Administration is able to ram their plan through Congress (and they almost certainly will be able to do this), at some point the money to back the bad loans currently bundled into Fannie Mae and Freddie Mac securities will literally come from our own individual pockets in the form of tax dollars.

That price tag could be as high as 5.5 trillion dollars. In fact, the price tag could end up being so high, that along with Congressional approval for the bail-out itself, the Bush administration will also need permission to bump up the ceiling on the federal debt by as much as 50%. The national debt is already so large that at the current rate of spending we will not be able to pay even the interest portion on it by 2050, and at that point it will actually exceed our gross national product.

So how can we possibly bump it up 50%? As the title of this website points out, I’m an amateur economist, so maybe I am missing something here, but didn’t we just borrow a load of money from China so we could send out economic stimulus checks that were refunds on the taxes most of us paid last year? We borrowed that money, the money for our tax refunds, so again, I have to ask, where is this money for these bail-outs coming from? Are we just going to print some more up?

I have looked all through my bank accounts and I confess, I can’t pick up even a few pennies of Fannie Mae and Freddie Mac’s problems, and it gets worse every day here in Michigan, where I live, where the unemployment rate is over 10% and growing and gas is currently about $4.30 a gallon.

I don’t even know how we are going to pay for fuel oil this winter. I ordered it early, hoping to head off whatever ungodly price will be charged come September or October, but so many people had the same idea that the oil company still hasn’t delivered it. They can’t keep up with the phone calls let alone the oil deliveries in the dead heat of summer, and now I hear all of us red-blooded, can-do types are going to bail out the fat cats at Fannie Mae and Freddie Mac too.

Wow, talk about piling on the pressure.

After 9/11, the President urged the American people to go shopping and go on vacation as if nothing had happened; to spend money and keep spending, or the terrorists win. So people did that. We spent money. We spent money we didn’t have. We spent money that didn’t exist in any universe, not even in the alternate Bizzaro Universe at Bear Stearns. Now, having spent up all the money, we are supposed to come up with some more money to help out giant lending institutions.

Like I said, I’m still waiting on my fuel oil: I’m a little light in the wallet this week.

Talking heads universally agree that the federal government almost has to bail out these giant institutions or risk destabilizing not just U.S. markets but the markets of the entire world. And yet, as we lurch from one economic disaster to the next in this country, each one bigger and scarier than the last one, we are bleeding credibility. Does anyone seriously think that anybody is at the wheel anymore? I don’t think so. And as that sinks in, things will begin to fall apart in a very big way.

OPEC is about a hair away from changing over to euros instead of dollars because of our instability and waffling, and once that happens, the dollar will fall harder than a fruitcake on December 26th.

Here are a few other implications of the “solution” to the latest catastrophe on Wall Street:

More Bank Failures. The FDIC is out reassuring the world that just because it shut down IndyMac Bank Saturday and just because it expects up to 150 more bank failures in the coming year, this is really nothing to be concerned about since during the savings and loan fiasco in 1994 its list of troubled institutions topped 575. In 1994 I made quite a bit more money than I do now, and so did most of the people who work for a living in the U.S. Not a good way to make me feel better, FDIC, try again.

Loss of Confidence in the U.S. We are living on borrowed money, literally. We borrow from China and Japan and the Mideast just to pay the basic costs of running our government. So far, these countries continue to loan us money because we are a major market for their products. But as we continue to not manage our own finances in any kind of sane or coherent way, they will begin to rethink their lending. No law exists that says they have to keep lending us cash. In fact, as developing nations buy more and more of their own products (as in China, where a consumer middle class is now emerging), these nations will have less and less reason to lend to us.

Higher Mortgage Rates. It is going to get more expensive and more difficult now to get a mortgage anywhere in the U.S., and it will be nearly impossible in some places. This will only make the housing crisis worse, which will only terrify Wall Street even more.

More Assets Sold. On the other hand, our current situation makes commercial real estate in the U.S a fabulous bargain for overseas investors. As more U.S. corporations resort to selling off their assets to raise cash, this will result in more cash flowing out of the U.S. and into the already deep pockets of foreign bargain hunters.

Violence. Seriously, at some point it will get ugly here. Working people in the U.S. are already stretched to the limit, and more and more people are not working. In a city close to where I live, a bicyclist was recently stopped by a motorist who was frustrated with having to suddenly share the road with so many non-motorized vehicles. The motorist beat the bicyclist within an inch of his life. Biking accidents that involve bikes being struck by cars are up 80% in some parts of the state this year alone.

When my kids were little, they used to complain about having to clean up the kitchen when they didn’t make the mess. I’d point out to them that I spent the better part of most days cleaning up after them, and I was glad to do it; that part of being a family means you clean up after each other and you don’t gripe about it.

OK, but in this case, I guess I want to know, when are the big guys going to cut us little guys some slack? When do I get to borrow the family Mercedes?

When do I get my multi-million dollar golden parachute?

I’m not greedy. A single million would be plenty, that’s all I really want or need. Send it in care of www.amateureconomists.com. And Quatar? Stop calling me.

I don’t answer my phone anymore.

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