Re: [Pen-l] Wall Street awaits the new RTC

[Doug Henwood <dhenwood@xxxxxxxxx>]

On Jul 21, 2008, at 5:45 PM, Jim Devine wrote:

> I don't get that. The USG's (U.S. government's) "creditworthiness"
> problem would seem to arise from its _failure_ to completely bail out
> the GSEs (government-sponsored enterprises). That is, it's supposed to
> stand by Freddie & Fannie. It hasn't done so as much as many think it
> should, undermining its credibility. But if it comes around and saves
> the GSEs, Wall Street would say that "all is forgiven." Right?
>
> I don't think people should worry about the creditworthiness of the US
> government: after all, the government's debt to GDP level was much
> much higher at the end of WW2.

Sure, it'd be big time trouble for the USG if the GSEs defaulted. But  
the only way the USG can prevent the GSEs from defaulting is by  
borrowing on the Treasury's account. Some more traditionally minded  
investors might find that somewhat troubling. The price of credit  
default swaps on US Treasuries rose in the days after the GSE  
announcement.

And yes the debt level was higher at the end of WW2. But: 1) this is  
not a world war, so any sane person sees the present as more the  
result of bad policy decisions (or long-term economic decline, take  
your pick) than life and death urgency, and 2) WW2 was all financed  
domestically - the USG today is financed by the countries we import  
the stuff we no longer make from.

Doug
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