Tuesday, September 09, 2008

Rubbish Roubini Column

Nouriel has strayed from his usual beat of ultra-bearish economics and wandered into politics. Oh dear. Maybe his high profile appearances on the NYTimes and elsewhere have gone to his head. It's always ugly when that happens. Anyway, this latest column is a dog.
Today instead the US has performed the greatest nationalization in the history of humanity. By nationalizing Fannie and Freddie the US has increased its public assets by almost $6 trillion and has increased its public debt/liabilities by another $6 trillion. The US has also turned itself into the largest government-owned hedge fund in the world: by injecting a likely $200 billion of capital into Fannie and Freddie and taking on almost $6 trillion of liabilities of such GSEs the US has also undertaken the biggest and most levered LBO (“leveraged buy-out”) in human history that has a debt to equity ratio of 30 ($6,000 billion of debt against $200 billion of equity).
Rubbish. Fannie and Freddie were always part of the US Government -- that's how they operated and that's why they were able to issue debt at par with Treasuries. All this has done has formalized what was a widely accepted and only slightly informal arrangement. Therefore, the US Govt has not changed its public assets or liabilities by one iota. They are exactly what they were before, because nothing has changed.

Also, Nouriel claiming that the US has turned into the world's biggest hedge fund is also rubbish. A country that has obligations far in excess of its productive capacity and a monetary system leveraged to the hilt has been an enormous hedge fund for quite a while.


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