THE heads of the Federal Reserve and the US Treasury have been forced to try to calm fears that the nation’s two largest mortgage firms, Fannie May and Freddie Mac are going bust, and that the US housing market faces total collapse.
Shares in both companies hit 17-year lows on Thursday.
Federal Reserve and US Treasury heads Bernanke and Paulson have called for new powers to try to wall off the US economy from crises such as the collapse of a Wall Street financial giant.
They told the US Congress they needed to modernise the regulatory system, but that Fannie Mae and Freddie Mac had adequate capital.
Investors fear the two mortgage firms will not survive without a government bail-out, since both are seeking to raise funds to cover losses of more than $11bn (£5.6bn) each since the credit crisis began last year.
Paulson, however, said: ‘Their regulator has made clear that they are adequately capitalised.’
Freddie Mac and Fannie Mae were created by the US government to make it easier for more people to get on the housing ladder. They were then privatised. They were the sub-prime mortgage kings and now they are going bust.
Up till now the two companies have been able to borrow at a lower rate of interest, because bankers believed that the government would not allow them to go bankrupt despite Freddie Mac shares sliding 22% to $8 a share, and Fannie Mae losing 13.8 % and sliding to $13.20 a share on Thursday.
Bernanke has now recommended that the current phase – the Federal Reserve bailing out the bosses – is brought to an end, and replaced by ensuring the ‘orderly’ and ‘controlled’ liquidation of finance firms on the verge of bankruptcy.
Bernanke is proposing to try to regulate controlled crashes that will leave the US market as a whole intact and still in business. This plan is already being condemned as too little, and very much too late.
He proposes that the US administration and the Treasury should take a leading role in this process, because of the worldwide financial implications of a Wall Street firm crashing.
Currently, the Federal Deposit Insurance Corporation has powers to act as a receiver for an insolvent bank, to make liquidation easier.
Bernanke is seeking to extend the facility to the whole of Wall Street.
Under this arrangement the Treasury would consult with the company’s regulator and other authorities, before taking action to liquidate the company.
Meanwhile, the pressure of sky high oil prices is intensifying the US crisis.
Opec has said that it is unable to pump more oil and that by 2030 the demand for oil will grow by 50%.
Opec blames the rocketing oil prices on oil speculation, and says that low prices led to an under equipment of the oil industry. It concluded that ‘low prices were bad for the oil industry, and in the longer term they were also bad for consumers.’
Crude oil rose to a record high of just $147 a barrel yesterday, while in Afghanistan 47 mainly women and children were slaughtered in a US bombing raid.
This is the crisis that is driving capitalism over the edge of the abyss into slump, trade war, oil and gas wars, and revolutions.
Only the socialist revolution, on a world scale can resolve the crisis of capitalism and bring in the socialist society, based on the nationalisation of the means of production, and the development of the productive forces in a planned socialist economy, developed to satisfy human needs, and not to produce for private profit.
Central to this prospect is the development of the Fourth International, all over the world, to provide the revolutionary leadership that the working class of the world needs to carry out this struggle forward to victory.
