(I began publishing my monthly newsletter, The Bob Livingston Letter™, in 1969. The following is an excerpt from the March 2000 issue. I was one of the first writers to warn of the coming crash in the housing markets and lay the blame on the steps of Fannie Mae and Freddie Mac. I forecast exactly where we stand today.)
The credit bubble is still growing — some day it will burst… Two biggies are Fannie Mae and Freddie Mac. Combined they have $1.6 billion reserves to cover 1000 times that much debt that they created. Add to this the credit being created by Wall Street and major corporations like GE Credit, GMAC, Ford Motor Credit, etc. Just get this: While the Federal Reserve has increased its reserves by $70 billion in the last 21 months, the above have created credit in excess of $521 billion. Mind you, these artists call debt “assets.” Economists are so used to calling debt “assets” until they are oblivious to the underlying horror. Do not be misled into believing that only banks create credit.
These institutions outside of banks create credit in the system by issuing debt instruments in exchange for cash which they use to buy mortgages or other financial assets.
The Fed can affect the price of credit but not its availability. This massive debt is inflationary and it has of course spilled into the stock market and into a huge trade deficit. When this bubble is pierced, it could take decades to unwind.
Americans are drunk on consumption and the huge trade deficit is the result. When the party’s over, debts to foreigners will be measured in the trillions. How can we avoid a dollar crisis and a dollar collapse vs. foreign currencies, especially the Swiss Franc? Make no mistake about it, the U.S. dollar is tied directly in with this big bubble of speculation in the U.S.