US Government has bailed out Freddie Mac and Fannie Mae – the two main organizations for mortgages. Their debt and useless mortgages had reached an unsustainable level. This has put the future of finance industry to question. As far as effect of this action is concerned, the following are some macro and micro results of this action:
– interest rates you pay on your home loan will drop 0.25% immediately and maybe drop another 0.5%. This rate drop is projected because now with government ownership, the risk premium on capital has dropped because the government can always “pay up” by printing money.
– American national debt just doubled in ONE weekend!
– On the short term stocks may have risen, but the higher debt will bring down the dollar and also increase inflation further as the Oil prices rise.
Jim Rogers, CEO of Rogers Holdings, said it very well when he said:
“America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it’s just bailing out financial institutions,”
Ultimately, who benefited? The institutions, their executives, the brokers who kept making questionable loans, and the home owners who were borrowing WAY above their pocket.
Btw, Washington Mutual (WAMU), is now on probation, which means they now have to file more paperwork. So their risk profile has deteriorated and the market will demand a high risk premium – which will hurt their already bad financials. It seems that this is just the tip of the iceberg… EVEN now!