housing bust GSE

Shrinking money supply and collapsing housing market

"By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and the economies of many other nations as well.
- Federal Reserve Governor, Ben Bernanke, 2004

Ben Bernanke, Nobel Prize winner Milton Friedman, and most other economists out there agree that the reason the Great Depression was so deep and destructive was that the Federal Reserve failed to keep the money supply from shrinking. I'm a little more skeptical, but I agree that it would be impossible for an economy to grow without a growing supply of money in a debt-based monetary system.
That's why this news article should be extremely distressing.

The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever.
"It’s frightening," said Professor Tim Congdon from International Monetary Research. "The plunge in M3 has no precedent since the Great Depression. The dominant reason for this is that regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets. This is why the US is not recovering properly," he said.

As our political and financial leaders are using every tool at their disposal to jump-start the economy, there are fewer and fewer dollars in circulation. That's not a prescription for a growing economy. It's a prescription for economic disaster.

The carefully designed disaster at Fannie and Freddie

The situation at the mortgage giants of Fannie Mae and Freddie Mac continue to get worse. The news yesterday is that Fannie Mae lost another $25.2 Billion last quarter and has requested another $15.2 Billion bailout just to stay afloat.

“We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,” Fannie Mae said in a statement.

The other player here, Freddie Mac, is watching defaults on its mortgage debts accelerate to record highs. Freddie will need another bailout as well.