Secretary Paulson and George Bush have just made a HUGE bet with your money by taking over Freddie Mac and Fannie Mae. It may work. But it depends heavily on the faith and credit that the world bestows on our economy and our currency. But if it doesn't, hold onto your kischkas.
The only credit that we have as a Nation is the faith that others have in us
This morning, the markets are reacting favorably to the Fannie and Freddie bailout. The markets are anticipating that the US treasury will do whatever it needs to do to guarantee that the mortgage market has enough liquidity to keep the real estate market afloat. It may work, and it may not. However, what's making it work for the moment is that the world still has faith in us, notwithstanding our profligate spending and borrowing (read, Iraq war and stupid tax cuts). In addition, we are helped by the fact that the US dollar is the currency of trade. However, if we lose international faith and credit, then we will lose that position of power, probably to the euro, and then we really will see our standard of living decline dramatically.
A scary fact is that foreign auto makers, BMW in particular, sell their cars in the US at a loss because the dollar is low. If BMW priced its cars here in the US (in dollars) high enough to make a profit back in Germany (in euros) no one in the US would buy them. So they sell here at a lossto maintain market share in the hope that the euro/dollar exchange rate will come back down. Currently, the US is BMW’s largest market. However, if the world continues to lose faith in the US, its economy and its currency, then BMW will give up on the US market, sell their cars at a price that actually reflects their costs in euros, and no one will be able to touch a BMW, either new or used.
"Who cares?" you say. Well, the answer is that all kossacks do. The same analysis that applies to a BMW 750 also applies to a Prius or a Civic. It used to be really fun for Toyota and Honda to make cars that sell well in the US; but the weakening dollar make those formerly rewarding efforts into a chore. I’m sure there are many readers here who bought a new Prius for somewhere in the mid 20’s (USD). Would you have done it if the price was in the mid 30’s? How about the mid 40’s? And as the price of a new Prius rises, so does the price of a used one.
I'm not sure if I conveyed it, but what this means to me is that our very lives as we know them are at stake in this election. Tax-cutting, lot's-more-wars McCain, and his sidekick, the earmark queen, will put politics over policy the way that Bush and Co. have for eight years. They simply cannot grasp the size of the stakes of this bet and are not willing to make the sensible policy decisions to keep us economically safe.