Re: National Bankruptcy
[quote=Lorn;651542]Well, I hear what you are saying. And yes its the common thinking maybe in the elitist government circles and those who are/think they are in power.
I certainly don't agree with it. Yes, it would be horrible if all this debt were written off. Horrendous actually. But at the end of the day, the hard reality is most, maybe even all of it is absolutely worth zero. So if the government wants to buy something that is worth zero how can that be good? In fact all it will serve to do is make things worse.
I hope these guys are right. But shit is shit, no matter what one does to it.[/quote]
Yes, most of it is obviously worth essentially zero and everyone knows it (although, actually, distressed debt can have value and actually be highly lucrative - aka junk bonds). But that's not the point. The point of such government intervention is a belief that the consequences of letting a Fannie Mae fail and suddenly unwind its losses on the open market is worse than shouldering some of the losses and unwinding them in a slower, more controlled manner.
And that's a matter of case-by-case debate. But I have to say, I really think you're drastically underestimating the impact that an outright failure of some of these institutions can have on us. Have you asked yourself what the likely consequences would have been if we had just stood by and watched while, for instance, Fannie Mae and Freddie Mac died? These institutions originate or guarantee about [I]75% of our mortgages and held $5 trillion in debt[/I]. That is larger than the debt of most NATIONS. So let's start here in the US:
Tons of banks have balance sheet assets full of Fannie Mae and Freddie Mac mortgages. They wouldn't have survived the fallout and you'd have banks going down right and left all over the nation. We have the FDIC, but that's only up to $100k so you can imagine how many people would essentially be losing cash and what the runs on the banks would look like anyways; that would only end up causing more banks to fail. So now you have the entire banking system faltering.
Furthermore, you'd now have a bunch of lenders gone and panic would ensue among the remaining market participants, so liquidity would just [I]complete dry up[/I] - overnight. So forget about getting financing if you're a business or a student, forget about maintaining access to your credit cards, forget about buying a car, forget about getting a mortgage to buy a home. Not to mention that home values across the nation would be decimated. So now you have untold millions of consumers suffering and [I]drastically[/I] curtailing their spending, and you have businesses folding throughout the nation. Massive unemployment would soon ravage the country and a nasty bout of deflation would take hold. And can you imagine what the equities markets are doing during this time? The crash would make 1929 look like a tea party. Many businesses would end up going under and untold billions of people would lose everything.
And it gets worse. Foreign entities and government obviously notice this and don't want to even touch American debt anymore. Not to mention that many international banks are also interwoven into this matrix and hold tons of assets that originated from Fannie Mae and Freddie Mac mortgages. They'd all start going under. And then you have the international equities markets, and you can guess what will happen to them.
So you end up with the financial equivalent of throwing your car into reverse while driving 100 mph down the freeway. In other words, widespread economic disaster. Our economy would basically stop, and so to a large degree would our way of life as well. It's a pretty damn good case for government intervention.
Here's an article with some good quotes in it from finance ministers and financial experts around the world regarding Fannie Mae and Freddie Mac:
[URL]http://www.npr.org/templates/story/story.php?storyId=94424809[/URL]