Nationalization of “Fanny” and “Freddie”, the US largest mortgage agencies, was unprecedented news. While in Russia and in a number of European countries the process of privatization and nationalization is painful, bit still usual, in the US the state is not used to take trouble about the property, and this-time nationalization is an extreme measure taken so that to avoid bankruptcy.
Incidentally, it got known yesterday that FBI has begun investigation about the leadership of Fanny and Freddie, Lehman Brothers and insurance company AIG on suspicion of rendering false information. So the crisis is just going up.
In the meantime, the Russian financial authorities do not seem to notice the negative news. The finance ministry does not express any concern about the fact that the money of the Reserve Fund is invested into Fanny’s and Freddie’s bonds. On the contrary, the ministry has proposed an initiative of making another state corporation for managing the money of the National Wealth Fund. It is supposed that a significant part of the petroleum dollars, accumulated in Russia, would be put into shares and bonds of the leading foreign companies. Well, that’s an audacious initiative, considering the speed at which the seemingly unshakeable financial institutions are queuing for bankruptcy…
The things in the American economy are getting worse and worse. Most economic indicators show the increase of the crisis phenomena caused with the crash of the mortgage lending system in summer 2007.The economic stagnation is combined with the price rise, aggravation of unemployment and reduction of consumer’s demand. The fall of stocks at the Wall Street is accompanied with rise of credit cost and a wave of bankruptcies. So far, all the attempts by the US finance ministry and Federal Reserve System to handle the crisis have not been successful.
A number of American economists believe that the matter is not about just another cyclical crisis but about the destruction of the economic order similar to that of the ‘30s last century. That crisis began with fall on the stock exchange in October 1929 and grew into the Great Depression. The weekly Business Week wrote that the investors have to pay again for the irrepressible greed of the Wall Street.
The system of debt economy became one of the foundations of the US post-war economy after WWII. The temptation to buy now and to pay afterwards financed the American dream about one’s own home and about material wealth. It also financed the Washington’s claim for the world domination. Besides, due to the new currency system, made with the Bretton-Woods Agreement of 1944, America could borrow money from abroad in dollars. The US financial system began a kind of “Wonder field” for placement money in on interest.
Hypothecary securities by two state-private agencies, Federal National Mortgage Association, made by the Congress in 1938, and the Federal Mortgage Corporation, organized in 1970, began most popular with foreign investors. Called by people “Fanny” and “Freddie”, those agencies acquired the mortgage credit rights from the banks and formed packages of securities for selling it to investors. Such financial operations allowed millions of Americans to take housing on credit and turned the housing construction into a weighty factor of maintaining the market.
At the time being, Fanny and Freddie possess or guarantee the mortgage debts for the amount of $5.3 trillions, which is about a half of all the mortgage liabilities in the US. Both agencies suffered loss too, when in summer their shares began to fall rapidly. Saving them began to be the main trouble for Washington. The bankruptcy of the mortgage couple would be capable of destruction of the American debt economy and that could make the government announce the default, i.e. inability of paying off one’s debts. And the debts are quite sizable.
The US state liabilities had reached the amount of $9.5 trillions ($31,251 per head) by the middle of July 2008. The US debts to foreign owners of the financial assets are more than 9 trillion dollars. Japan, for example, possesses the US government bonds for the amount of $580 bn, while China has $500 bn. The two countries are also the largest holders of the dollar reserves – 1 and 1.8 trillions respectively. Washington is concerned that the owners of those assets may wish to get rid of it due to their fast devaluation…
Our financiers are also playing at the American market of the mortgage debts. However, the Russian gold and currency reserve and the means from the Reserve Fund were put not in the stocks of Fanny and Freddie, but in their liabilities, which are equal to a state liability. It’s been the ability by Washington to pay off these debts with interests that the US finance minister Henry Polson assured about the Russian Prime Minister in Moscow recently. He also tried talking into investing even more money into American mortgage. The full amount of the Russian support is not announced, but it is possible to be estimated indirectly. The informational agency Bloomberg has reported recently that the general amount of the investment into the US by China and Russia has reached $ 1 trillion.
Most likely, Washington will be able to save both agencies from the crash at the expense of their nationalization. But those two are not the only candidates for bankruptcy. The large banks Bear Sterns and IndiMac Bankor, that credited the mortgage, have already broken. The Merrill Lynch investment bank has had to go sold to its main competitor, the Bank of New York, while the largest insurance company AIG was saved again with actual nationalization. Now it’s Lehman Brothers’ turn. And the crisis is just gaining strength…
One may feel a pity for thousands of Americans who are losing their homes due to destruction of the mortgage market. However, the housing crisis in Russia is even worse and Russians need preferential financing of the mortgage even more than Americans. And the revenue out of investments with us is much higher than beyond the sea. Today Russia is considered to be even more attractive than China, India and Brazil. Alas, the Russians included in the Forbes list and those preferring not to appear there, they keep their money not in rubles, but in foreign currencies, and they buy up foreign industrial assets and real estate. This is much due to the fact Russia does not have mortgage agencies like Fanny and Freddie that could guarantee accessible interest rates for housing loan, and reliable return for investments into mortgage. And the investments into other branches, that the government is ready to finance jointly with private depositors, have been staying frozen for several months. According to estimation by the “Ekspert” magazine, the federal projects for the amount equal to about 10% of GDP have been non-financed due to discordant legislation and lack of guarantees for private deposits.
And the Russian banking system is under-financed too. Its capitalization reached 61% of GDP in this year, while even the Eastern Europe countries have a much bigger figure. The Russian stock market needs to be filled with financial resources too. At least, that would help the basic industries that constantly require the inflationary increase of tariffs to be made by the government so that to get investment resources.