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How American Socialism “Works”

Nov 7th, 2013 | By Shah Gilani
WallStreetinsights&indictments.com

America isn’t a socialist country, but don’t tell our President that, or Congress, or the Fed, or the too-big-to-fail (TBTF) banks. Because to them, it is.

That’s because socialism works for them. And Hells Bells, it’s hard to knock what works.

If you can’t feel the yoke around your neck, or the bit in your mouth, trust me…you will.

Sure, there are lots of examples I could give you, and you might argue that some socialist schemes aren’t working, and that free market capitalism will prevail.

Good luck with that.

Here’s the bad news: There is proof positive that socialism is the order of the day.

Of all places, it’s embedded in our free market capital markets.

Front and center this week, Freddie Mac and Fannie Mae are showing off their third-quarter results.

In case you forgot, F&F were saved from collapse (and from pushing America and the world into an abyss deeper than any place ever measured on earth) when taxpayers dressed up as U.S. Treasury saviors ponied up more than $188 billion to keep their doors open.

Treasury took them into their embrace in 2008, just as the crisis was unfolding, through what’s called a “conservatorship.” Whatever that really means legally, in the real world, it means Treasury created a “special preferred” class of stock that forced F&F to pay a 10% dividend to them, and they gave themselves warrants that are now worth $188 billion.

Seems fair, right?

The two giant Government Sponsored Enterprises, which were in private shareholder hands and issued hundreds of billions of dollars of bonds that investors bought because it was assumed that the government implicitly backed their bonds (which they did, so it was explicit). With the money they raised, they bought mortgages from lenders, packaged them into securities, and sold them to investors, and, oh yeah, bought them back to hold in inventory to collect the interest themselves.

When they became insolvent, the government that backed them (that’s socialism) then essentially took them over from private shareholders (that’s also socialism) because, after all, they were government wards all along (yep, that’s socialism, too).

We know what happened next. F&F couldn’t pay the government dividends on money they didn’t have, so, surprise surprise, they had to borrow it. That’s right; F&F borrowed money from the government to pay the government dividends. Why? So the government could say, look what a good deal we made for you taxpayers.

That’s not socialism?

We know what happened next. The Fed quantitatively eased F&F’s pain (which was by then the government’s pain, meaning the taxpayers, because we’re all one in a socialist country) by buying $40 billion a month of the same mortgage-backed securities that F&F-and the big banks-were holding. That put a floor under MBS prices and stabilized the housing market.

We know what happened next. Private equity shops and hedge funds, who handily contribute to the campaign coffers of the members of Congress they employ, were able to borrow-thanks to the Fed’s zero interest rate policy-and buy up houses out of foreclosure to turn into rental homes they will now start securitizing.

We know what happened next. Housing prices bounced dramatically and foreclosures slowed considerably.

And all of that made F&F profitable. Very profitable.

Freddie just made a $30.5 billion profit in the third quarter. Fannie made an $8.6 billion profit. Forget that accounting gimmickry has a lot to do with it, that’s another story.

Last year, Treasury changed the rules on F&F. They said, you slobs don’t have to pay us dividends anymore, we’re just going to take all of your profits. Thanks for making us look like we made you pay for those taxpayer loans we gave you!

Now, Treasury-that would be the government-is taking all the money they can from their babies. That’s socialism.

The question now is, why would the government ever give up this socialist all-you-can-eat trough it’s feeding from?

We should have broken up all the GSEs a long time ago and replaced them with private companies doing the same thing. We would have to keep them reasonably-sized enough so none of them, if they were to fail, would present any systemic risk. Which is what we should have done with the big banks.

Why did all the TBTF banks get bigger after the crisis? Why do we have GSEs in the first place? Because they are socialism’s pets. They are stroked by the powers that own them, the oligarchs and officers that always pretend their brand of socialism is for the good of the people.

For God’s sake, America…WAKE UP!

Shah

Posted in Washington

http://www.wallstreetinsightsandindictments.com/2013/11/how-american-socialism-works/