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Diane Francis

Diane Francis

Posted: September 8, 2008 05:10 PM

Mrs. Palin Has No Clue "who" Freddie and Fannie Are


Washington's takeover of America's two biggest financial institutions, Freddie Mac and Fannie Mae, is scary enough but market players worldwide are concerned that the Republicans have added a rookie running-mate to the presidential ticket who likely thinks Freddie and Fannie are a couple of Senators. Or a couple of constituents in Alaska.
That's why the attractive Alaskan is on a very short leash, tethered to her political Sugar Daddy John McCain. She had better stay that way and duck reporters until she cracks those briefing books and crams for the debate with Biden.
Even if she's a quick study, this is not Economics 101 at the University of Idaho we're talking about here. The recklessness of McCain's choice is underscored with this weekend's frightening move in Washington and proves the world has entered the most dangerous financial period since the 1930s.
Mrs. Palin may be relatively bright but she hasn't even a passing knowledge about the underpinnings of the financial or global capitalist system. She's handled a state budget which requires little sophistication, no education and zero policy comprehension. And despite that puny background, she could eventually be a heartbeat, or heart attack and cancer recurrence, away from becoming CEO of the world's biggest economy.
Her candidacy, and lack of sophistication, will contribute greatly to market nervousness.
And should.

Federal Deposit Insurance Corporation may be next
There will be more bad news before it starts to get better. The Fed has 150 banks on its watch list, in addition to the 11 that have already gone bust. If all go under, the Mother of Bailouts will be necessary.
Gerard Cassidy at the Royal Bank Capital Markets in Canada last week described the further fallout in his analysis called "The Texas Ratio" which looked at banking crises in the 1980s and 1990s. His "Ratio" is the point at which a bank's underlying value and bad debts intersect. Then they're headed for a bust, particularly since raising equity for banks in the U.S. is nearly impossible.
"If all 150 banks fail, the FDIC will be insolvent," he wrote.
As the FDIC's liabilities grow to 150 or more banks the insurer of last resort won't be able to cover its obligations to deposits of up to US$100,000 in a deposit account of up to US$250,000 in a retirement account.
When that happens, Congress will have to step in to avoid massive runs on the banks.
Next on the Republican list, for a new, bigger role for government, will be Detroit, suffering from the double whammy of high oil prices and low consumer spending due to the bursting of the real estate bubble. It will need the Mother of Earmarks to chug along as it figures out what to do in future.

The role of government, whether McCain, Sarah and their Republican base admit it or not, is not to remove all the referees from the ice, to use a hockey metaphor. Government's absence is in large measure to blame for this crisis.