Monday, December 28, 2009

Freddie and Fannie Get Unlimited License to Print Money: Time To Rethink Market Stances

The U.S. Treasury Department is removing the $200B cap on backstop aid to Fannie Mae (FNM) and Freddie Mac (FRE) for the next three years, in theory to allay investor concerns that the companies will exhaust the available government assistance. Under a new agreement just announced, the limits can rise "as needed to cover net worth losses through 2012".

Since when is the US Treasury constitutionally allowed to issue mortgages in the U.S. (or insure them through an infinite supply of cash, is there a difference?)

(Bloomberg) Julian Mann, vice president at First Pacific Advisors LLC in Los Angeles says the government is “beginning to realize it’s not getting better and it’s not likely to get better” soon in the housing market, “They don’t want the foreclosures now, so they’re saying, we’ll pay whatever it takes to continue to kick the can down the road.”

Is this not a license to inject money to prop up the economy? Bears may want to rethink their strategies if this is the case. An unlimited supply of money will not make prices go down. The new buying power of this money, howver, may be a lot more less, a fact that will be proven one day in the future, but there will be plenty of this cash around to prevent prices for falling (nominally)

This still does not directly encourage job creation though. Markets may remain nominally up, but tens of millions of people will remain on the sidelines.

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