Your Fannie is too big...

My friend Steve just attended a panel on the economy. One of the keynote speakers was Peter Schiff, author of Bull Moves in Bear Markets, and someone I highly regard (disclaimer: I am in no way, shape or form an expert on macroeconomics, I just know a smart guy who listens to other smart guys).

Schiff stated that this recession (or whatever you want to call it) won't be anything like what happened to Japan in the 90s. I'm thinking -- oh, thank god, 'cause that was really bad, right?! No, he said, it will be far worse....

Oh shit! Why is that? Well, because the Japanese actually had savings. They also had a manufacturing-based economy that was still viable. We -- the good 'ol US of A -- do neither. Ouch.

I had never really grasped how the workings of FNMA/Freddie could have possibly contributed to all of this until you really think about the fundamental relationship between RISK and REWARD.... You see, the fact is that the fundamental perception that these mortgage-backed securities were/are somehow *implicitly guaranteed* by the US Government makes them, well, WAY more attractive as an investment (after all, we all know that the US government will not possibly allow them to fail, right? It's bad form). Offering low risk/high(ish) reward securities does something perverse....it throws the thermodynamics of the risk/reward relationship out of balance. What?? You'll pay me a moderately high return on something that offers little to no risk, hell yeah -- where do I sign??

What does that do? That, in turn, creates this huge lopsided demand for said securities which then demands additional supply (i.e. boundlessly high housing prices) -- all until -- POOF, Joe the Plumber starts defaulting on his stucco McMansion in the exurbs when his incredulously low introductory teaser rate adjusted under this mis-assumption that he could just sell that bad boy if he had to. AH, I think I am starting to understand. THAT -- plus the fact that housing supply had far exceeded even the then-ravenous demand. Add to that the whole lending-to-people-who-are-completely-un-credit-worthy thing, and LUCY, you got some 'splainin' to dooooo.

And nobody saw this coming. Really? By the way -- Where's my dollar, Art Laffer? You idiot.