Troubled Times Ahead

Terence R. Wilken

So what is going on in the bond markets?  Is there something wrong with the money policies that we know and love?    We are in for some interesting times.  The government is trying to borrow money to help pay off the deficits, and the bond markets are telling them that if they wish to have more to finance their follies, that they will have to pay for the privilege.  Does that not sound like the banker that you know?

The only problem is that this will also affect the long term borrowing of everyone else.  It is already becoming harder to obtain good financing to buy a home, and this will mean that fewer home seekers will be looking at homes for sale.  If you have to sell your home in a hurry, the only choice will be to lower the price in order to attract buyers.  Home values may start to trend down.  How will this affect your neighbor?  He does not want to sell his home, but would like to borrow on it in order to install that new swimming pool.  He finds out that not only has the value of his home has gone down, but now it will cost him more to obtain financing.  What a tangled web we weave.  Things do affect each other.

The markets also appear in trouble.  Could they be affected by the same malady?  It would not surprise me.  Let us just put another log on the fire, and sit back for a long winters snooze.  That would fit right in because by this winter we may not be able to pay for the gas to heat our homes.  We may not even be able to go to the gas station to get the fuel to power our chain saw in order to cut the log to put on the fire.  The price of oil and natural gas is starting to increase at a time that we can least afford it.  What are we to do?

What is happening in the markets could impact all of us.  It could even impact the two biggest sources of money that fueled the housing boom.  These two sources are Fannie Mae, and Freddie Mac.  I have been asked several times why I am so interested in these two institutions.  Well now I will answer that question.  In their own way they were following the policies of Enron before Enron thought it was the right thing to do.  They were given the task of making housing affordable to everyone, even those who did not have a sound financial footing.  This meant that they took big risks with their money.  Of course they did not worry as they were backed and supported by the faith and credit of the federal government.  They did however hedge their risk in several ways.  Not only to protect themselves in the case of default, but also in the situation of rising long term interest rates.  The method of hedging took the form of establishing derivative positions in the markets.  Where have we heard that word before?  The only problem is that it is hard to protect yourself in the case of a rapidly falling bond market.    The situation occurring now could bode ill for them and for all of us.

Now for the real reason!  My son is a professed democrat.  I am not affiliated with either political party, but I will say in his defense that we certainly agree on a lot more that we disagree on.  About two years ago he was telling me about the evils of the free market system.  I told him that we had not seen anything yet to match what our own government policies could do to us.  I told him that within the next three years that Freddie Mac, and Fannie Mae would make the private markets look like kindergarten children.  I still believe that.  There were certainly a lot of people that were hurt by Enron, WorldComm, and many other free market Companies.  The sad part is that if these two financial powerhouses go down, it will be all of us that get to pay for their errors.  I wonder who is auditing these two Companies.  That could certainly give us some advance warning.

Well I certainly hope that Alan can print enough money to bring down long term interest rates, make the dollar strong again, create another bubble in the equity markets, and take care of all the other ills that are currently affecting us.  After all is it not the government that is supposed to take care of all of us?  We have almost forgotten how to do things for ourselves.