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Fed official admits the emperor has no clothes!

Fed official admits the emperor has no clothes!

St. Louis Federal Reserve President William Poole finally stated the obvious
when he said that Fannie Mae and Freddie Mack “may not be sufficiently
capitalized to weather a financial shock,” that they “pose a risk
to the financial system and the U.S. economy,” that they “hold capital
far below that required of regulated banking institutions,” and that “the
government should make clear it doesn’t back the firms.”

Such profound admissions from so credible a source could well be the pin that
finally pricks the housing bubble. America’s foreign creditors have been ignoring
the risks inherent in the debt of Government sponsored enterprises because
of the supposed existence of an “implied government guarantee.” The
sudden realization that no such guarantee exists could cause a wave of selling
in these instruments, sending mortgage rates soaring. Without access to cheep
and plentiful mortgage credit, the entire U.S. bubble economy will implode.

One has to wonder why Poole is making these comments now? After all, the implications
of these admissions are staggering. Together Fannie & Freddie insure about
50% of the home mortgages in the United States. What is even more incredible
is that Poole is actually underestimating the problem. It is not that Fannie
and Freddie can not withstand a “financial shock,” they can not even
withstand the normal course of business. These two entities are so highly leveraged
that even a minor recession with a relatively small increase in interest rates,
and a modest decline in housing prices, would send both into bankruptcy. Food
for thought.

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