Fannie Mae & Freddie Mac

In the banking business there is one iron-clad law: no bank, on its own, can pay off all its depositors at the same time. Banking works only when depositors have confidence in the bank’s solvency. There are quite a number of banks out there whose solvency is now burdened by huge amounts of foreclosed loans and deflating house values.

Fannie and Freddie held the bulk of these loans. If they fell do you think any of those other banks with solvency problems could stand? If those other banks fell could you tell if your bank might not be next? If you were in doubt, what would you do?


The only people living in America who know first hand what a bank panic is are now in their eighties and nineties. Almost everybody else, except economic professionals, are clueless about how much our entire system of private equities is based on investor trust and confidence, and how fragile that confidence truly is. All that has to happen to bring down all the dominoes is for a sufficient number of depositors and investors to decide to get liquid at the same time.

The ultimate guarantor of the solvency of the entire equities market is the United States Government. Every facet of government involvement in all private equities ultimately has one major end: to prevent investor panic and a stampede to get liquid. All other ends are subordinate to this one.

No matter how badly any financial institution has been run the government must always act swiftly and boldly to intervene, no matter how much it may cost the taxpayers. Afterward it can investigate for fraud, or do anything else it needs to, but a timid government is a government that is undermining confidence across the board through all equities exchange.

It is far more important now than it ever has been. In the 1930’s, when the bulk of government intervention started, the government was itself relatively debt free. It is so no longer. And it’s debt has expanded exponentially based on the current Administration’s philosophy that “deficits don’t matter”.

There is no logical reason why there could not be a run to get liquid among holders of US Treasury bills, too, though this is highly unlikely.

Unlikely, but not impossible, and that is one of the reasons [there are others] why deficits do matter despite Dick Cheney’s cavalier assertion to the contrary.