US Debt Ceiling Negotiations: Off-Budget Spending Vehicles Need Reform Now

| June 1, 2011 | 0 Comments

I’d be willing to bet most of America is in the dark on this one.  And quite honestly, we need to shed some light on the matter.

At this moment, Congress is voting on raising the debt ceiling.  And the first go around failed to pass the House miserably… as expected.

And you should be concerned with the debt ceiling vote.  Because failure to increase the debt ceiling could dramatically impact your portfolio.  Before I talk about the dirty secret, let’s discuss the debt ceiling vote first.

I’m sure you’re aware by now we’ve run into our debt ceiling.  The debt ceiling is the official limit of debt in the United States… and it currently sits at $14.3 trillion.

With US debt likely to remain at high levels for some time, our government needs to address the issue now.  Simply raising the debt level without addressing the underlying spending issues won’t solve the real problem.

If we don’t increase the debt ceiling, the US government will be unable to pay the interest on their obligations.  And it will lead to multiple credit rating agencies downgrading US debt!

A downgrade of US debt would create mass chaos in the markets… the bond markets would be in a tailspin.  Investors will pull money out of America and move it overseas.

While you may not care about anything our Congress does, you might want to pay attention to what’s next…

And America’s dirty little secret could cause more chaos than even a debt ceiling default.

I’m talking about Fannie Mae and Freddie Mac.

If you’re wondering how they can affect you and your retirement, let me explain.  Because the effects can be catastrophic…

The debt ceiling vote and controlling US spending is just a start.  What we really need is to get rid of the massive “off-balance sheet” debt.  That means we need to forever banish Fannie and Freddie!

S&P already has warned the US about a pending credit downgrade if we don’t address these issues, regardless of any debt ceiling expansion.

Here’s where Fannie and Freddie come in… They are simply the two largest off budget spending vehicles in the country, if not the world.

Let me put it in perspective… according to the Wall Street Journal, the two agencies are in the hole to the tune of $200 billion.  So we’ve got quite a mess on our hands.

Why do Fannie and Freddie matter to US debt?

To start, you need to know all of the mortgages guaranteed by Fannie and Freddie are financed by mortgage backed securities.  As of now, the US government backs Fannie and Freddie’s debt.  So any losses from falling mortgage values are funded by the US taxpayer.

It’s pretty clear, any increase in the debt ceiling without a clear and specific timetable to off-load Fannie and Freddie is pointless.

And I only point the fact out as S&P has warned the US about it already.  They’re wise to the game the US government has been playing.  The bottom line… the longer Congress allows Fannie and Freddie to stay in business, the more the US credit rating is endangered.

We need to make sure our representatives include Fannie and Freddie reform in the debt ceiling/entitlement spending debate going on right now.

S&P has made the case pretty clear… either clean up the mess or pay the price.  Downgrades to our credit ratings are a probability if Fannie and Freddie are left as is.  And the damage they could cause would roll global markets.

You may not normally care about what Congress does, but let’s hope they get this one right…

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Category: Bonds

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