Over the past couple of weeks there has been a massive shift in the US markets. The Federal Government took over Fannie Mae and Freddie Mac, the two largest home mortgage lenders in the market. Then on top of that they bailed out AIG yesterday to prevent its bankruptcy. Meanwhile, they stood on the sidelines and allowed Lehman Brothers to enter Chapter 11. The interesting thing about this...is that there are a lot of interesting things.
First and foremost is the US government's increasing role in the private market. They have an 80% equity stake in AIG, one of the world's largest insurers. They control Fannie Mae and Freddie Mac, and therefore most mortgages in this nation. That is a massive surge in US involvement in the free market. Suddenly we're looking like Italy. They're busy tossing taxpayer money into a bottomless pit called Alitalia all for the prestige of having a national airline. The Italian government has done this in the past, but this is the most ridiculous prestige project they could worry about...having Alitalia be Italian doesn't help anybody. At the same time, the US is propping up companies that are significant parts of the economy. If Fannie, Freddie, or AIG failed, it would be a shock that wouldn't just reverberate around the US, but around the world.
Second is the massive change in economic concerns that we are seeing. Just a month ago we were concerned about inflation. Now it's deflation. While the Fed has kept rates the same (at what was certainly an inflationary level before the oil spike deflated), it's done a few things. One is that it didn't help the housing bubble to ease - it popped, and even a Fed Funds rate at 0 wouldn't have helped. Private lenders' rates are what matters, and there hasn't been a good correlation between those rates and the Fed rate since the Fed started easing it to prevent the popping of the mortgage bubble. Companies saw decreasing land values and credit on those loans dried up. Of course, there's still the matter of all those securitized mortgages floating around. They've killed several small banks, Fannie, Freddie, Bear Stearns, Lehman, Merrill Lynch, and AIG. Washington Mutual seems to be close to failing, and Wachovia may not be far behind. I think that we still might have a few shocks left, and we could be in for some Japanese-style general malaise. That's not to say that we'll be standing in bread lines and looking for fruit picking jobs like The Grapes of Wrath, but there will be discontent, some general malaise, and stock market losses. Of course, at the same time, banks and other companies are writing these losses off much quicker than they did in Japan, so perhaps we'll get through the pain and get back to business. One thing the government has shown is that they won't allow everything to go down the tubes for the sake of staying out of the market. That's a good thing and a necessary thing. Fortunately we do get collateral for our investments and hopefully they will turn a profit like the airline bailout in 2001 did. Nevertheless, I do expect some more shocks before this is all over. Now that housing and oil have burst...what's the next investment that will?