What next?

Voltron says: The collapse and bailout of Fannie and Freddie is possibly bigger than then Enron and every other accounting scandal combined. So what does this mean to my forecast? Well, we now have a very large, important and irrational player in the game – the government. There is a fascinating power struggle between Washington and Wall Street. Politicians get big donations from Wall Street (including Fannie and Freddie to the tune of $186 million), but politicians are resentful of Wall Street’s conspicuous wealth and the power it can buy. Now Wall Street has finally overleveraged and painted themselves into a corner. They are calling in all of their favors, but they are so beaten up this time that Washington can pull the rug from under them. Bill Gross, PIMCO’s top bond fund manager has bet heavily on a Fannie/Freddie bailout (link) and on Friday he said that if he doesn’t get one, he’ll take his ball and go home (link). The government can do anything from nothing, to a complete - throw moral hazard to the wind - socialize the losses bailout of everyone at taxpayer expense, to total nationalization of the banking system. I’m not sure which way they are going to go, but in any case it’s not good for the US dollar.