On Sunday, July 13^th 2008, Treasury Secretary Henry Paulson announced that the US Treasury and Fed will support Fannie Mae and Freddie Mac by backing their debt “as needed.”

This sounds a bit like a blank check to me. Is this a good idea and how capitalism is supposed to work?

According to the New York Times, the Bush administration considered, but hasn’t yet implemented, a different plan that would “offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies.” This would be a “far less attractive option…because it would effectively double the size of the public debt.”

This “different plan” may never be implemented, but no matter how Fannie and Freddie’s troubles are handled, my feeling is that these stocks could be headed for zero.

That may be the least of our problems.

My fear is that if we continue to see further housing price declines (which is feeding the financial sector decline), increasing foreclosure rates, more bank failures, declining consumer confidence, higher oil prices, higher inflation and a falling dollar (among other issues), the “perfect storm” that so many people are talking about may intensify significantly.

Then, if the storm does get worse, could our government attempt to prevent panic by going ahead with the plan and backing Fannie and Freddie’s entire $5 trillion debt?

What might be the consequences of such a scenario?

Could we be on the cusp of a severe problem that would dwarf anything we’ve seen so far?

To quote Daniel Plainview from the movie, There Will be Blood, I’d like to “speak plainly.” I wonder if our government has stacked on an amount of debt which might prevent us from responding to an emergency like a total Freddie and Fannie bailout, without causing another depression. (Assuming we’re not heading for one already.)

To explore this issue, I did a little digging. I’m not going to quit because we’re experiencing a confluence of events that’s starting to scare me.

First of all, let’s get some perspective on big numbers, because that’s what we’re dealing with when it comes to federal money.

I’ll quote from the following website which asks,

“What’s the difference between a million, a billion, a trillion?

A million seconds is 12 days.
A billion seconds is 31 years.
A trillion seconds is 31,688 years.

A million minutes ago was – 1 year, 329 days, 10 hours and 40 minutes ago.
A billion minutes ago was just after the time of Christ.

A million hours ago was in 1885.
A billion hours ago man had not yet walked on earth.

A million dollars ago was five (5) seconds ago at the U.S. Treasury.
A billion dollars ago was late yesterday afternoon at the U.S. Treasury.

A trillion dollars is so large a number that only politicians
can use the term in conversation… probably because they
seldom think about what they are really saying. I’ve read that
mathematicians do not even use the term trillion!
Here is some perspective on TRILLION:

Trillion = 1,000,000,000,000.
The country has not existed for a trillion seconds.
Western civilization has not been around a trillion seconds.
One trillion seconds ago – 31,688 years – Neanderthals stalked the plains of Europe.”

So one trillion seconds ago, Neanderthals were stalking the plains of Europe. This sounds like a significant number.

According to this Website, our National debt is about $9.5 trillion. The share for each citizen currently comes out to $31,233.96. (It’s updated and increased every few seconds.)

My friend and neighbor Gary Boone lent me a very interesting book called, The Tipping Point: How Little Things Can Make a Big Difference, by Malcolm Gladwell.

The author’s main premise is that small changes can take place in human society over a long period of time without much effect, but often times a critical point is reached where any additional change causes a substantial and dramatic effect on society. The author cited several impressive examples in an attempt to demonstrate this concept.

I believe that US Government debt is already astronomical and that an additional $5 trillion of debt for a possible total bailout of Freddie and Fannie wouldn’t be a “little thing” and could in fact lead to catastrophe.

One possible consequence: Could the US Lose It’s Triple AAA Credit Rating?

Again, this might be the least of our problems.

Fannie and Freddie might be “too big to fail” as we’re constantly hearing politicians say, but what if their debt is too big for a possible total bailout? What if the US government and our economy simply can’t handle another $5 trillion in national debt but the US does it anyway? What if?

Please keep in mind that no one can predict with certainty what will happen with the economy. My position is that action should only be taken with serious consideration of the possible consequences.

See you soon when I’ll be talking about peak oil theory and the very alarming implications for our economy!