Feds bailed out China, not the US
The Fannie-Freddie rescue will work out great for emerging markets abroad, but it's going to kill us here at home. You might find some relief by investing in a handful of recommended foreign stock.
By Jim JubakThe U.S. government's takeover of mortgage market makers Fannie Mae and Freddie Mac will lead to a rapid recovery in the real-estate market, a rebound in economic growth and a surge in lending by a newly confident banking sector.
Yep, the takeover and restructuring of the two U.S. mortgage giants is a great thing -- for China and for many other developing economies of the world.
The case for putting more of your portfolio to work outside the United States was very strong even before the Treasury announced its scheme. After the deal, I think it's imperative that investors with a time horizon of more than six months move money into overseas assets.
Not right away, though. We're still in a global bear market for stocks. But sometime within the next six months, I think investors will get an all-clear on overseas markets, especially in developing economies. After spelling out the logic of my worldview, I'll end this column with five stocks to add to the watch list that I started with my previous column (see the left-hand side of this page).
Bad for us
How is the deal cobbled together by Treasury Secretary Henry Paulson, the former Goldman Sachs (GS, news, msgs) CEO, bad for U.S. stocks and bonds and for the U.S. economy? Let me count the ways:
* The deal adds $5 trillion in debt to an already stressed national balance sheet. That basically doubles the U.S. national debt and can't help but push the U.S. dollar lower and U.S. interest rates higher in the long term. The U.S. government is going to have to sell more Treasury bonds to cover its new debt.
* Taxpayers are on the hook for somewhere between $25 billion and $200 billion. That's money that will have to come from higher taxes or from more government debt.
* The need to sell more debt to fund this takeover will lead to higher interest rates in the Treasury market. (This is besides the rising tide of the annual federal debt. The Congressional Budget Office puts the deficit at $407 billion for fiscal 2008 and a record $438 billion for fiscal 2009.) Treasury yields are the benchmark for everything from mortgages to credit cards to corporate loans. Higher interest rates on Treasurys will push up mortgage and other interest rates.
More from MSN Money
* The combination of faster growth in the money supply -- as the government sells more bonds -- and a weaker dollar will add to forces pushing inflation higher in the United States.
* The decay in the financial fundamentals of the U.S. government could finally lead to the United States' loss of its triple-A debt rating. A downgrade would force the U.S. to pay higher interest on its debt.
* Higher interest rates will lead to lower economic growth. The Federal Reserve calculates the U.S. economy can grow at 2.5% or so before it risks setting off inflation. The extra debt burden from this takeover will make it hard for U.S. growth to hit even that relatively modest target.
* And, yes, after being asleep for years as the problem grew and grew, the Treasury may not have had any alternative if it wanted to prevent an immediate meltdown in the U.S. mortgage market and in the U.S. financial system in general. But if the Treasury is serious about starting to shrink the mortgage obligations of Fannie Mae and Freddie Mac starting in 2010, the price of an immediate fix could be a double-dip slowdown in the housing industry in 2010. Less mortgage money available from Fannie and Freddie in 2010 sure isn't going to help the housing industry sell houses.
Good for them
For China, on the other hand, the results of the takeover are almost uniformly positive:
* The rescue bails out the banks and central banks that had put too much money into mortgage paper backed by Fannie and Freddie. At the end of 2007, Chinese banks held $376 billion in what the financial markets call agency debt.
* Now the commercial banks in China -- and the Chinese government -- don't have to worry about problems at Fannie and Freddie turning into problems on their balance sheets. Chinese banks are now free, therefore, to make more risky, ill-considered loans to domestic companies.
