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During the quarter there were…

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Another Retail Giant Bites The Dust

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Franklin D. Raines, Director of Central Planning

Money Supply (M3)
Total Money Market Fund Assets
Mortgage Refinancing Index
Institutional Money Fund Assets
Fannie  and Freddie Assets

Unsettled market conditions remain the norm, with sellers carrying more firepower this week. For the week, the Dow declined more than 1% and the S&P500 about 2%. Economically sensitive issues performed poorly, with the Morgan Stanley Cyclical index sinking 4% and the Transports dropping 3%. The Utilities added 1%, while the Morgan Stanley Consumer index was largely unchanged. The broader market was weaker, with the small cap Russell 2000 and the S&P400 Mid-Cap indices declining 1%. The technology sector gave back some of last week's gains, as the NASDAQ100 declined 3% and the Morgan Stanley High Tech index retreated 2%. The hyper-volatile Semiconductor index sank 11%, returning much of last week's surge. The Street.com Internet index was largely unchanged, while the NASDAQ Telecommunications index dipped 4%. Biotech stocks were generally unchanged. The financial stocks were mixed, with the consumer lenders again coming under selling pressure. The S&P Bank index was largely unchanged, while the AMEX Securities Broker/Dealer index added 1%. With bullion suffering a $5 decline, the HUI Gold index dipped 2%.

The credit market generally enjoyed a decent performance, at least on the surface. For the week, 2-year Treasury yields declined 4 basis points to 2.75%. Yields on the 5-year dipped 5 basis points to 3.82%, and 10-year yields declined 6 basis points to 4.61%. The long-bond saw its yield drop 7 basis points to 5.36%. Mortgage-back and agency securities outperformed, with benchmark yields generally declining 9 basis points in both sectors. The benchmark 10-year dollar swap spread narrowed 3 basis points to 68. The dollar continues to rally, with the dollar index adding almost 1% for the week.

The Mortgage Bankers Association's index of refinancing applications jumped 23% last week to a record 5,253 (previous mark set the week of October 9th, 1998, at 4,389). This index has more than doubled in four weeks and trebled in nine weeks. During this week's conference call, a Fannie Mae executive commented that the average cash out refinancing (before the post-WTC super refi boom) saw about $34,000 extracted. We see that broad money supply (M3) jumped $20 billion last week to $7.865 trillion, an increase of $212 billion over the past seven weeks. Broad money supply has ballooned $943 billion (13.6%) during the past 52 weeks. By individual components, we see institutional money funds jumped another $21 billion last week, and have surged an astounding $319 billion, or 53% annualized, so far this year (40 weeks). According to the Investment Company Institute, total money market fund assets have increased $397 billion so far this year to $2.258 trillion, a 27% growth rate. Difficult to make sense out of Larry Kudlow's "deflationary monetary policy" rant this afternoon on CNBC.

"New York, October 18, 2001 - Moody's Investor Service lowered the senior debt rating of Ford Motor Company to A3 from A2…The downgrade of Ford's rating reflect the erosion in the company's longer-term competitive position in North America…This weakening in Ford's competitive position is occurring as the U.S. automobile market is entering a cyclical downturn that could be exacerbated by the aftermath of the September 11th terrorist attacks." Ford, a "Triple A" credit during the seventies, has now seen its credit-rating drop to the lowest level since 1984. Despite widening spreads, the company plans on issuing $7.5 billion of new bonds in what would be a prudent move in the face of an increasingly hostile environment.

"New York, October 16, 2001 - Moody's Investor Service placed all the long term debt obligations of Enron on review for downgrade following the announcement by Enron of significant write-downs and charges, reflecting substantially reduced valuations in several of its businesses. These actions affect Enron's broadband operations, its merchant portfolio and the Azurix water company holdings…Enron is one of the world's largest energy concerns with approximately $63.4 billion in energy assets." Enron took a $1.01 billion after-tax charge during the third-quarter. There appears to be an additional $1.2 billion charge against equity that the company has thus far refused to adequately explain.

From Market News International: "Moody's Investors Service said Wednesday that the quarter ended in September was the second worst ever in terms of dollar volume of speculative-grade corporate bond defaults, at $21.9 billion by 48 issuing companies. The rating agency also reiterated its prediction of continued credit deterioration until late in the first quarter of next year, with the outlook possibly leavened by the prospect of federal stimulus packages. In the year-ago quarter, defaults totaled $11.0 billion by 33 issuers… Year-to-date, some 185 issuers have defaulted on $76 billion. The third-quarter default rate for speculative-grade-rated issuers rose to 9% from the second quarter's 7.9% and from 5.7% when the year began. A year ago, in September 2000, the third-quarter 2001 default was forecast to reach 8.4%."

"Fitch-NY-October 15, 2001: The month of September produced $4.1 billion in defaults and resulted in year to date default volume of $60.1 billion. Fitch calculated a year to date default rate through September of 10.2%, up from 9.6% in August, and double the 5.1% recorded for full year 2000. The trailing twelve month default rate through September was 11.7%… Based on a review of the average credit quality of each sector going into the current crisis and an analysis of credit measures for the top issuers in each sector, Fitch has identified seven industries at greatest risk for increased defaults in the next six months. These include leisure and entertainment, computers and electronics, broadcasting and media, transportation, textiles, chemicals, and paper and forest products."

Yesterday, subprime credit card lender Providian announced a significant earnings shortfall, while admitting that it was going to be forced to drastically reduce lending to a high-risk segment of its customer base representing about 30% ($9.4 billion) of its receivables. Such a move can be the kiss of death, as rising balances are often the only mechanism to keep risky borrowers from defaulting. In the face of rapidly deteriorating fundamentals, the company's chairman resigned. The company will now fight for survival, with Wall Street and the FDIC watching anxiously. The company's stock was crushed today, and its bonds came under heavy selling pressure. Providian ended the quarter with $32.2 billion of managed receivables, up 31% from one year ago. Total assets of $21.4 billion were funded largely with about $16 billion of deposits. The rapidity of Providian's impairment, and its apparent loss of access to marketplace liquidity, is an ominous harbinger for the asset-backed security marketplace and the entire consumer finance sector. It is also one more body blow to an increasingly vulnerable credit insurance industry, with Ambac confirming this afternoon that it has $960 billion of exposure to Providian securitizations. Ambac ended the quarter with $454 billion of net financial guarantees in force, with an exposure to "capital ratio" of 152 to 1. An important issue going forward will be the response by the credit insurers to the increasingly broad-based deterioration of credit conditions. If they move to more carefully manage risk, thus limiting new credit guarantees, this would have a significant impact on the ability of Wall Street to securitize and sell risky loans. There is also the key issue of general confidence throughout the asset-backed security marketplace. Such developments have huge ramifications for what has to this point been the basically unlimited availability of consumer credit.

"New York, October 18, 2001 - Moody's Investors Service has assigned a rating of Aaa to the approximately $103.6 million in Class A asset-backed notes issued by Duck Auto Owner Trust 2001-C. The rating is based upon a surety policy provided by MBIA Insurance Corporation… The securitized pool was comprised entirely of retail vehicle loans that were originated through 'buy here-pay here' lots that are owned and operated by subsidiaries of Ugly Duckling Corporation (UDC). 'Buy here-pay here' obligors have weaker credit histories than most subprime borrowers and often make semi-monthly payments directly at the originating dealership. As a result, the loans originated from UDC lots have experienced higher delinquencies and losses than those experienced by most other subprime portfolios… The 2001-C receivables pool of approximately $109.4 million…includes 12,271 loans that have an average current balance of $8,918…a weighted average original term of 36.5 months and a weighted average remaining term of 35.4 months. The pool had a weighted average APR (annual percentage rate) of approximately 28.28%."

This week Fitch rated the receivables-backed notes issued by AmeriCredit Automobile Receivables Trust 2001-D. A total of $1.5 billion of securities were rated, including $220 million "class A-1 fixed-rate money market notes," $510 million class A-2 variable-rate notes,' $345 million class A-3 variable-rate notes, and $425 million class A-4 fixed rate notes." All of the securities were top-rated. "The securities, which represent the 29th securitization offered by AmeriCredit Financial Services, Inc. (ACF), were issued with a financial guaranty insurance policy from Financial Security Assurance Inc. (FSA), which is rated 'AAA' by Fitch. The insurance policy ensures full and timely payment of interest and ultimate payment of principal by the legal final distribution date of each class. The ratings are based on the terms of the financial guaranty insurance policy and insurer financial strength rating of FSA, the transaction's sound legal and cash flow structures, and the strength of ACF as originator and servicer of the receivables." It is quite a Credit system that can transform subprime auto loans into securities to be sold to money market funds. We expect the quality loans underlying money market assets will be an increasingly important issue going forward.

The company's press release stated that "AmeriCredit is the largest independent middle market automobile finance company in North America," with $20.2 billion of automobile receivables-backed securities having been issued. And while it is understandable that at this stage of the Credit cycle company management would like to believe that it has developed into a large "middle market" lender, but with delinquencies (including repos) at 11.8% and customers paying about 19% for the privilege of borrowing, the company's only transformation has been into one enormous subprime lender.

We see that Household International increased managed receivables by $4 billion (19% annualized) to $95.7 billion (up 15% y-o-y) during the quarter. "Growth in the real estate secured portfolio was strongest, with a 19% increase from a year ago. This portfolio comprises nearly 44 percent of total managed receivables." Credit card heavyweight MBNA reported a 25% increase in earnings, as its managed receivable portfolio increased by $2.2 billion during the quarter to $92.6 billion. The company has added 8.4 million accounts so far this year. Subprime credit card lender Metris saw managed receivables jump $880 million to $11 billion. Year over year, receivables were up 30%, while reserves increased 21%. Average customer balances jumped 18% to $2,300, as the net charge-off ratio increased to 10.7% from 9.8%. One doesn't like to see this combination of trending ratios. Looking at the industry, it is frightening to see how large these aggressive consumer lenders have become during this protracted cycle, and the extent to which risky credits have been securitized and sold into the marketplace. This untested market, and all the financial engineering that goes with it, will soon face it first rigorous examination.

Aggressive credit card lender Capital One saw third-quarter profits jump 35%, with its "total assets" (managed receivable portfolio plus other balance sheet items) expanding at a 39% annualized rate to $44.5 billion. Customer balances have jumped almost 60% during the past year. The company added 2 million new accounts during the quarter, increasing its total to 40.1 million. During the past four quarters, the company has expanded its balance sheet (total assets) by 44% to $23.5 billion, with "interest-bearing deposits" jumping 75% to $11.1 billion. Bloomberg quoted company president Nigel Morris: "Anybody can lend money - the challenge is to figure out who will actually pay you back. Super-prime customers are going to be the most resilient to recession." We concur strongly with his first point, but see a serious flaw in the crucial business assumption made in the second. We suspect the company has plenty of looming credit problems lurking within its 40 million customer base that will quickly manifest as soon as this inordinate growth tempers. And it is going to take much more than favorable historical data and positive credit scores to convince us that, in this extraordinary unfolding environment, flooding the country with billions of mailings offering huge credit lines and low teaser rates is good business. It is much more likely especially bad business and, at the minimum, very risky business.

It doesn't seem like it was that long ago that I was perusing through Capital One's third-quarter 10-Q from 1997. Back then the company had a $6.3 billion balance sheet, with $1.05 billion of deposits. Its managed portfolio totaled $13.5 billion. Unlike today, they were then perceived as anything but one of the better credit card lenders. In reality, back in 1996/97 it looked very much like they were heading for serious trouble. At the end of 1997's third-quarter, total managed delinquencies had jumped to 6.36% from the previous year's 5.31%. Managed charge-offs during the quarter jumped to 6.66% from 4.19% the year before. This rapid deterioration developed not only in the face of significant receivable growth, but also as most credit card lenders were enjoying improved credit performance. The company set course to grow its way out of trouble, and by all appearances they did the unusual by actually pulling it off. All the same, put us in the skeptic camp.

The company and Wall Street would like the marketplace to believe that they have discovered the Holy Grail for aggressive consumer lending. We think they were rather fortuitously in the right place at the right time. Their pell-mell assault on receivable growth coincided with the blow-off stage of U.S. Credit excess fueling unprecedented U.S. household sector debt accumulation and historic stock market and real estate Bubbles. We sense company management may be too confident in their strategy and systems, not appreciating the seminal deterioration developing in the macro environment. If offered a bet on their systems versus the unfolding macro problems, we'll take the macro. Hubris can be a very dangerous thing, especially in the aggressive lending business. At a minimum, we are not comfortable with the incentive structure. Company management crafted a plan providing themselves enormous payoffs in the event of higher stock prices. At the same time, the company has aggressively raised FDIC insured deposits ("If you're looking for high yields, FDIC security and a variety of terms, we have the savings products you've been searching for."). We are not fans of "heads company management wins big, tails the taxpayer loses."

And speaking of dysfunctional private profit and taxpayer risk arrangements, it was quite a quarter for Freddie Mac. Earnings jumped 24% (y-o-y) to $813 million. Total mortgage purchases surged to a record $126 billion, up 125% from third-quarter year-2000. Total mortgage portfolio growth (the company's retained portfolio and outstanding mortgage-back securities) jumped $59 billion (23% annualized) to $1.107 trillion. Freddie's retained portfolio grew $27 billion (24% annualized) to $471 billion. Total assets surpassed $537 billion, having increased more than 11-fold during the past decade. During the past year, Freddie's short-term debt jumped 35% to almost $245 billion (45% of total assets). "Investments" surged 36% to $66 billion.

Fannie Mae saw its net income jump 22% (y-o-y) to $1.38 billion. Total "business volume" (mortgage purchases) increased almost 140% from last year to $159 billion. Year-to-date, Fannie has made purchases of almost $430 billion, more than double last year's pace. Fannie's total book of business increased $67 billion, or at a 20% annualized rate, to surpass $1.5 trillion. Outstanding mortgage-backed securities expanded at a 24% annualized rate, while Fannie's retained portfolio grew at a 14% annualized rate (growing only 5% during September). Total assets expanded at a 15% rate to $767 billion, having increased more than 5-fold in ten years. Fannie purchased 1.7 million of its shares during the quarter. Over the past year, Fannie and Freddie's combined total book of business (retained mortgage portfolios and their guaranteed securities held in the marketplace) has jumped $417 billion, or 19%, to $2.61 trillion. At the same time, combined shareholder's equity has increased less than $3 billion to about $36 billion.

Comments by Tim Howard, Fannie Mae chief financial officer, from this week's company conference call: " Obviously, the events of September 11th are now dominating the public policy debate. They've pushed the issue of Fannie Mae's Political risk to the sidelines for the near-term. But I believe they may have reduced those risks significantly over the longer-term as well. The swift and massive response by the U.S. government to offer aid in the wake of the tragedy has made it abundantly clear that the government has an interest in the continued well-being of a potentially wide range of entities deemed critical to the smooth workings of our economy. In this context, I think it will be easier for policymakers to see that Fannie Mae's relationship with the government does not convey a unique advantage. To the contrary, what now may seem unique is our regulatory and capital standards, which requires us to be able to survive our version of a disaster scenario, which is a risk-based capital stress test, entirely through our own risk management practices and capitalization with no government assistance at all. In an era of explicit government support, I suspect that academic exercise to measure implicit guarantees, where no real money changes hands, will be of relatively little interest. And while I don't hold out much hope that our competitors or ideological opponents will stop making claims about us, or seeking to have our charter changed, I do think that in the post-September 11th climate, policymakers will be even less likely to be sympathetic to those claims and requests that they may have been previously. And that, obviously, is to our advantage."

Howard Shapiro, analyst, Goldman Sachs, posing a question during the conference call: "I wanted to approach the credit quality issue from a different angle, if I could. Given the fact that your losses are so low and you are very comfortable with the outlook going forward, and perhaps the rest of the market is a little bit more concerned about credit quality, couldn't we argue that this is a good time to be taking on additional credit risk and being paid for it? And could we see that perhaps either in a higher guarantee fee on new business or buying new kinds of mortgages with a higher guarantee fee, or perhaps less off-loading of mortgage credit risk to third parties?

Responding, Adolfo Marzol, executive vice president/chief credit officer, Fannie Mae: "I think it's a good question. It's certainly a conversation that we are having. I've been very comfortable with the strategy that we've had around particularly new market segments and new products, to do a fair amount of risk sharing. And that's been a good strategy for us, and we've had good partners in that strategy. I do think that our partners are seeing the changing economic environment. I do think that the execution for credit enhancement - the cost of the execution of credit enhancement - is probably rising. I think we are going to have to take a look at potentially transactions where the cost of sharing risk the way we've been doing it may start to get prohibitive. And so we may take a chunk of dollars, I think with a good box around how much of that we would do, and try to be opportunistic. But we're having that conversation but we haven't made that decision yet."

How Mr. Howard (with his company taking full advantage of its unlimited access to the markets) can claim, "Fannie Mae's relationship with the government does not convey a unique advantage" with a straight face is quite a feat. And I wonder if their "disaster scenario" and "capital stress test" incorporates the inability to roll its short-term debt, or a systemic problem in the derivatives market. But I find it just as curious that any mention of hypothetical Federal Reserve ("repo") purchases of U.S. stocks seems to incite a strong emotional response, while the virtual nationalization of the entire U.S. "conventional" mortgage financing market progresses with nary a tepid protest. It is my view that one of the least generally appreciated financial and economic aspects of the post-WTC financial landscape is the marketplace's adoption of absolute federal government backing for the GSEs (as evidenced by collapsing credit spreads!). And while I never expected anything less, I had anticipated that such a resolution would likely come after (or in the midst of) a break in confidence within the agency market (perhaps related to a dollar, derivative, or other systemic dislocation) - that explicit federal government backing would be instigated after an episode of serious systemic crisis. Garnering the government's full backing while the GSE Bubble is very much intact - better yet, in the midst of an unprecedented lending boom - is a much different circumstance with momentous and disturbing ramifications. All indications are that the GSEs have been granted carte blanche, and they have proved without a doubt that they will move aggressively to capitalize. With this in mind, I would like to highlight some of the comments made Monday by Franklin D. Raines, Chairman and CEO of Fannie Mae, at the Mortgage Bankers Association's 88th Annual Convention.

"Bottom line, we project that consumer demand for residential investment could double in this decade, from $11 trillion today, to $21-$25 trillion by the year 2010. This would cause demand for mortgage capital also to more than double, from the current $5.4 trillion to $11-$14 trillion by 2010. The 1990s were a terrific decade for housing. This decade could be even better. Let me walk you through how we derived these optimistic projections. First, in the near term, while the economy is in a downturn right now, the economic stimulus from Washington - the rate cuts, tax cuts, and the boost in spending - will probably make any recession we have short and mild. At the same time, because interest rates are already low and still falling, the impact of a slowdown on the housing market is expected to be less than typical. And the surge in home refinancing is giving a boost to the overall economy. In fact, a New Economic paradigm seems to have taken hold. Traditionally, whenever the economy caught a cold, housing got pneumonia. Now the opposite is occurring - housing tends to do better than the economy. One explanation is that in good times and maybe even more in bad times, owning a home is a powerful draw and a safe, strong investment…"

"The third driver (in addition to population growth and rising homeownership rates) that will boost residential investment in this decade is that we expect continued healthy growth in property values. History is on our side. Since World War II, property values - on a nationwide basis - have grown almost every year, and often faster than inflation. This trend will probably continue…we could see total home price gains of between 5 and 6.5 percent per year over the decade…your average $150,000 home today would be worth over $250,000 in 2010. In total dollars, consumers right now have about $11 trillion invested in residential housing. If that amount grows by 7-8.5 percent a year, by 2010, residential investment will reach a total of $22-$25 trillion. That raises an important question for the mortgage industry. How will homeowners choose to fund this $22-$25 trillion investment?"

"Over the last 50 years, homeowners have steadily increased how much of their home they choose to finance. In the early 1950s, the average debt-to-value ratio in America was just about 20%… By 1980, the average debt-to-value ratio had grown to roughly 30 percent, and by 1990, it was 40%. Now the ratio is 47%. What is driving this trend? There are two major factors. First is the revolution in flexible, low down payment lending, thanks chiefly to automated underwriting and the success of mortgage insurance. Nowhere else in the world is it more possible for the average family, without a vast reservoir of cash reserves, to become a homeowner. Low down payment lending has democratized homeownership in America. Secondly, in the meantime, the average homeowner has become more sophisticated about managing his home equity wealth as it grows, and our housing finance system has been making it far easier to do that. Where it used to take a month or more to refinance your mortgage, for instance, it now takes about a day. This has been great for the economy. And because property values have continued to grow, homeowners can tap their equity wealth without increasing their overall debt burden…

"The trend of increasing debt-to-value ratios is likely to continue as homes continue to appreciate, and our industry offers even better ways to allow homeowners to harness that wealth. And this trend will further boost the demand for mortgage credit. In fact, if you take the projected growth in residential investment, and factor in the projected growth in debt-to-value ratios, the demand for mortgage credit - the demand for what everyone in this room supplies - would grow an average of 8-10 percent per year for the rest of the decade. In other words, our market will grow faster than many of the country's fastest growth industries…At this rate, bottom line, mortgage debt outstanding, our market - which right now totals about $5.4 trillion - would more than double in size and reach $11-$14 trillion by the year 2010. So much for the talk about the decline in housing. Not with 13-15 million more households, a homeownership rate climbing beyond 70%, and home values rising over 65 percent in this decadeIn fact, mortgage origination would average $1.6 trillion each year. If that doesn't seem like much after the year we're having, it's 71% higher than the yearly average in the 1990s. This could well be the best decade our industry has ever had. But there is an 'if.' A big 'if' is, we could have the best decade for housing ever IF the supply of mortgage capital can keep up with the demand. As the demand for mortgage capital doubles, we have to make sure that the supply doubles too. All of us will have to step up and do more. And no provider of mortgage capital is more committed than Fannie Mae is… What you get with Fannie Mae is the assurance, in good times or not, that we are there when you need us."

For starters, it disturbs us that the head of a thinly capitalized company (operating with the implied backing of the U.S. taxpayer), having more than $330 billion of short-term debt and $1.5 trillion of mortgage exposure, in what is clearly an increasingly hostile financial and economic environment, would make reference to a "New Economic Paradigm." We hoped that the technology bust had put an end to such nonsense. Certainly, wishful notions of a coming "best decade" are uncomfortably reminiscent of the silly extrapolation all too common during the euphoric days near the peak of the technology Bubble. Still, if these comments were coming from any another CEO it would be easy to chuckle and dismiss them out of hand. We, however, take Mr. Raines at his word, fully recognizing that he mans levers to the "money spigot," and has furthermore proved he has no qualms discharging a gusher. I have attempted repeatedly to explain the unusual (and precariously powerful) mechanism that provides the GSEs the unlimited capacity for creating money and credit - how they (largely through unharnessed expansion of money market fund deposits) create the liquidity that provides insatiable demand for their own "risk free" liabilities ("money"), thus providing a mechanism for unfettered monetary expansion. When Mr. Raines discusses ongoing real estate inflation and consequent equity extraction, we fully expect that he plans to operate the credit machinery at sufficient RPMs to accomplish his objectives. There is, however, the issue that this is not a "command economy," and it's not his call to dictate.

The nation's money supply and financial system are a public good, to be carefully guarded for the benefit of society as a whole. And, as the guardians of the currency serving as the key reserve for the global monetary system, we have responsibilities to our fellow citizens around the world. The U.S. monetary system is not Fannie Mae's; it is not Wall Street's. Regrettably, we have for too many years watched the Greenspan Federal Reserve shun its key responsibility for protecting the soundness and stability of the U.S. financial system. We have witnessed historic and absolutely reckless money and credit growth emanating from the Washington-based government-sponsored enterprises. During the past four quarters, Fannie Mae and Freddie Mac have combined to increase total assets by $268 billion, or 25%, to $1.4 trillion. This is an unprecedented credit expansion, surpassing by almost 30% the 12-month lending boom during the post-1998 crisis "reliquefication." Over the past 12 quarters, Fannie and Freddie's combined assets have ballooned a stunning $621 billion, or 86%%, to $1.34 trillion. (The Federal Home Loan Banks have yet to report third-quarter data, but the third of the "Big Three GSEs" has increased assets by almost $300 billion over this period). It is no coincidence that money market fund assets have increased about $940 billion during this three-year period. We have as well watched this Credit Bubble fuel an historic technology boom and bust, a nationwide housing inflation and over-consumption boom Bubble, and endemic maladjustments in what should be recognized as an unfolding fiasco. Too much true economic wealth has been destroyed, too many unsuspecting have lost their financial security, and too many specious financial claims have been created that will cause significant grief down the road. The economic prospects for future generations are being put in jeopardy by this nonsense. This has gone way too far, for too long.

I recognize that this is a difficult time for our nation, but this should not be used as an excuse for ignoring that we are in the midst of committing a momentous blunder. And while Mr. Howard smugly believes that the GSEs are today bulletproof, I plead with anyone in a position to have an influence to make the case that these institutions need to be reined in. This absolute recklessness has been going on for better than three years now, and have we not seen enough to recognize that dangerous GSE Credit excess is a cause and not a solution to our predicament? This is not "rocket science," but analysis of the conspicuous abuse of credit. And while Fannie Mae executives claim the U.S. economy is "well balanced," the sad truth of the matter is that what seem like daily bankruptcy announcements are evidence that the withering away of our nation's productive capacity is only gaining momentum. It is no exaggeration to claim that we are witnessing the wholesale degradation of the very fabric of our economy.

And why do we as a society remain blind to the self-reinforcing dynamics of a dysfunctional financial system? Isn't it clear that faltering profits for producing companies only encourages a more permissive environment with greater incentives for the Providians, Fannie Maes, Capital Ones, AmeriCredits, and Household Internationals to lend more precariously; that the consequences of previous Credit Bubble excess only foment additional excess and greater impairment to the system? With this in mind, should we be at all surprised that our financial system is so unstable and economy functioning poorly, when the rewards overwhelmingly favor risky lending, leveraging, and speculating in financial claims such as mortgage-backs and subprime asset-backed securities, instead of productive investment in the real economy? Why invest and produce when the Fed and GSEs have mastered the manipulation of interest rates and marketplace liquidity, virtually "pegging" financial profits for anyone with a hankering to lend or speculate? We are today clearly to the point where the crucial market pricing mechanism has been so severely perverted that financial "profits" from lending and speculating - as opposed to true economic profits - are the dominating driving force throughout the economy. With such dysfunctional monetary processes, why, tell me, should we not expect the outcome to be anything but a financial and economic debacle?

So does it make sense to stay the course? Do circumstances justify pushing to the side the critical issue of the soundness of our financial system and economy? And are we, as a democracy, willing to accept without protest (or even debate) that our capitalistic system is being increasingly commanded from within the beltway surrounding our Nation's Capitol? I will be the first to admit that I am exasperated. But it looks too much to me like Franklin D. Raines, anointed Director of U.S. Central Planning, would like to create an eight year economic plan that calls for 5-6% annual housing inflation, 7-8.5% residential housing investment, 8-10% yearly mortgage credit growth, and $1.6 trillion annual mortgage originations. And, over the next eight years, with housing prices up 65% and total mortgage credit expanding to $14 trillion, we will create the "economic wealth" necessary to maintain consumption patterns and sustain the service sector-based U.S. economy. And in the process we can trade GSE liabilities for foreign produced goods and not miss a beat. Sure, it does have the semblance of a manageable 8-year plan; that is, unless market forces somehow get in the way. And to think that all of this has developed in the guise of a celebrated free market system. Marx would be absolutely giddy…

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