Green Retirement Blog

What caused the failure of Fannie Mae and Freddie Mac, the government backed agencies who secure half the U.S. house lending market, and the sudden government takeover?  The answer is contained in a reuters news report, and bodes ill for the U.S. economy overall, but may provide a silver lining for retirees.

“The companies never lost their access to capital markets where they raise money to support the U.S. housing market, but the biggest buyers of the debt have grown more cautious.

Foreign central banks reduced their holdings of “federal agency” debt in custody at the Federal Reserve in the past week for the seventh week in a row.”

The collapse of Fannie Mae and Freddie Mac was not caused, by internal U.S. economic forces, but rather by foreign investor reluctance to buy U.S. Government Backed Debt.  Why are foreign investors no longer willing to purchase U.S Government debt?

At the last Federal Reserve meeting to decide key interest rates, in the face of extremely high oil prices and commodity inflation, the Federal Reserve left interest rates un-changed.  With that decision, foreign creditors began selling their U.S. Government debt, their patience had run-out.  Very low interest rates, combined with a devaluing currency, do not make for a good investment.

Over a year ago in August 2007, the U.S. economy was on the verge of an economic collapse, and foreigners stepped in to prevent a repeat of a 1930’s style world-wide depression.  As I wrote in a June 23, 2008  article titled “Oil and Retirement“,

The patience and money of all three of these players, to keep our mis-managed and corrupt economy going, may be coming to an end. Our creditors, China, the Arabs, and the European Union, who combined hold trillions of dollars of our debt, are growing steadily unhappy with our in-ability to get our economic house in order.

Foreign investors made the decision to sell U.S. Government backed debt, when the Fed’s decision to not raise interest rates, signaled that the Fed and Treasury were more interested in protecting Wall Street than the U.S. economy.  Remember, purchasing U.S. Government debt, is an investment in the overall U.S. economy. More importantly, it also sent the message to foreign countries, that the Federal Reserve (as gatekeepers of the U.S. currency to which many of their currencies are pegged), was disinterested in helping bring down world-wide food and commodity inflation, high oil prices, hunger, food riots, work stoppages, taking place in their respective economies.

How does the failure of Fannie Mae and Freddie Mac impact your retirement? If you are a retiree, whose income is based on holding U.S. Government debt, such as T-Bills, Treasury Bonds, etc., you maybe getting a raise soon and inflation may be on it’s way out.

At some point, it should have been back in June, the Federal Reserve will begin raising interest rates.  The Federal Reserve would like to wait until the elections are over, if they have their way, but after that they will begin raising interest rates.  They don’t have a choice.  The United States is a debtor nation, we are dependent on foreigners lending us money, to continue to run our government.

And that means, roads, schools, hospitals, police, firemen, librarians, soldiers in Iraq and Afghanistan, airports, and the list goes on.  The only means available to the Treasury and Federal Reserve, to attract foreign investors back into U.S. Government Debt, is to raise interest rates.

For taxpayers, the failure of Freddie Mac and Fannie Mae, will mean higher taxes and reduced services.  For retirees, the silver lining is that the twin miseries of inflation and low bond yields, may be soon coming to an end.

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