Fannie and Freddie are just the start...

The following is a email that I sent to a few of my friends and family via email on December 31, 2009:

To my friends and family,

For those of you who haven’t heard, government backed companies Fannie Mae and Freddie Mac have already been bailed out to the tune of 100+ billion taxpayer dollars. Until recently this bailout was limited to $400 billion, but the Treasury Department has now declared that these companies will receive an endless bailout [1]. However, I believe this is only the beginning of the story. Despite the talk of economic recovery, mortgage defaults are increasing [2]. Furthermore, defaults are on track to increase in 2010-2012 as thousands of mortgages rates reset. These resets will cause the mortgage payments of financially stretched homeowners to increase dramatically [3]. Add to the mix that the employment situation is not improving as millions of people are moving over to emergency unemployment claims [4], and you can see that significantly more mortgage defaults and more bank losses are likely.

So who is going to bailout the banks and mortgage companies once again? The American taxpayer will of course! [Late addition: As of this morning, we now own a majority stake in GMAC [5].]  Over the next several years, the federal government will be forced to increase its deficit spending to pay the billions (or more likely trillions) in guarantees it issued to banks and companies like the Fannie and Freddie.  Furthermore, community and regional banks will continue to fail as more people default, and FDIC will have to cover these losses.  Unfortunately, the FDIC is or will soon be insolvent [6] and will have to use their credit line with the US Treasury Department. But with tax revenue down, where will the US Treasury get the money to bailout Fannie, Freddie, and the FDIC?   Someone will have to loan the government money by buying US Treasury bonds, but who?

Over the past decade, a large portion of government deficit have been financed by foreign governments buying US Treasuries. However, this trend has been changing the past few years, and it is not initially clear who is picking up the slack [7].  As this article discusses, it appears that our central bank (the Federal Reserve) is simply printing up money to covertly buy US Treasuries. Any student of history will find this policy extremely alarming (see Weimer Germany, Zimbabwe 2006-2009 , Argentina 1991). Still, I don’t expect you to believe me or any of my resources. I urge you to do your own research.

However, I will outline the problems we face in the next few years.

1. The Obama Whitehouse has promised $1+ Trillion deficits for the next decade. These optimistic estimates are based on 4% GDP growth during this same period, yet the US has not experienced sustained 4% growth in the last several decades. Thus, I believe government deficits numbers will exceed these estimates. 
   
2. Government guarantees (FDIC, Fannie, Freddie, etc.) will cause the deficits to balloon further because the issues I raised above. Generational cycles will exacerbate this problem even further [8].
   
3. Foreign governments/investors don’t believe we will pay them back, and they will continue to limit their purchases of Treasuries. (They have their own problems to address.)
   
4. The Federal Reserve will either continue to print money to buy increasingly large quantities of US Treasury bonds to cover government debts, or they will stop printing and allow interest rates to rise. [Note: Rising interest rates make mortgage resets more painful.]

Conclusion: I don’t know what the future will hold, but it is clear to me the US government cannot continue on the current path [9]. Our government is insolvent and has avoided discussing the problem with the American people. We have now arrived at a point where the US government has essentially two choices: default on its debts and obligations or allow the US dollar to be destroyed via massive inflation.

Once again, please read, pray, and consider these things. I know this may raise more questions than provide answers, but be certain as I am that God will get us through whatever the future holds. Still, we must seek his wisdom to understand these times and prepare for what lies ahead.

May the Lord bless you and keep you in these difficult times,
Matt

Links:
Fannie, Freddie Proving Too Big to Shrink - ABC News [1]
Subprime Delinquencies Continue To Soar - Clusterstock [2]
Mortgage Meltdown - Wave Two (Also check out the YouTube clip in the comments) - SHTF Plan [3]
New unemployment claims fall slightly while emergency unemployment claims surge - Zerohedge [4]
GMAC gets $3.79 billion more from Treasury - MarketWatch [5]
Bair Says Insurance Fund Could Be Insolvent This Year - Bloomberg [6]
Who is buying all these US Treasuries? - Jesse's Cafe Americain [7]
Generational cycles may cause the depression to last until 2016 - VisionVictoryManifesto [8]
December 2008 - GAAP-Based 2008 Federal Deficit - Shadow Government Statistics [9]