Economics Weekly – Financial markets: forever blowing bubbles? by Lloyds TSB

The bail out of Fannie Mae and Freddie Mac is ‘…one of the largest financial interventions not only in US history but in any country’s history. But the costs to the government is manageable’ says an analyst at S&P. The liabilities of the two GSEs come to $5.4 trillion and will be added to the US government’s gross financial liabilities, though it will not impact its credit ratings say many (though costs associated with insuring against US government debt default – CDS spreads – reached some 20 basis points on the news, or $20,000 for every $10m of debt). Some $200bn has been set aside by the US authorities for potential losses on the assets of the agencies, but the cost is more likely to be $325bn according to S&P, some 2.3% of US gdp.

Are some institutions too big to fail?

The bail out of Fannie Mae and Freddie Mac is ‘…one of the largest financial interventions not only in US history but in any country’s history. But the costs to the government is manageable’ says an analyst at S&P. The liabilities of the two GSEs come to $5.4 trillion and will be added to the US government’s gross financial liabilities, though it will not impact its credit ratings say many (though costs associated with insuring against US government debt default – CDS spreads – reached some 20 basis points on the news, or $20,000 for every $10m of debt). Some $200bn has been set aside by the US authorities for potential losses on the assets of the agencies, but the cost is more likely to be $325bn according to S&P, some 2.3% of US gdp. This highlights the ever rising costs of the financial bubbles that have plagued the world economy in the last 10 years, in part related to US monetary policy in our view but also global monetary trends. So many financial firms have become ‘too big to fail’ one has to wonder where this process of adding private sector debt to the public sector will stop. What will ultimately prevent it, of course, is a situation in which the public sector also becomes unable to take on any more debt.

 

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