Will Fannie Mae and Freddie Mac Impact Australian Business Owners?

Unfortunately, the housing market in the U.S. is in the tank with existing home sales at their lowest levels in more than 20 years and property values in steep decline thanks to simple supply and demand. U.S. realtors like to see a two to three month inventory of properties, indicating an active market. Current inventories of existing homes are over 12 months in some portions of the U.S. – especially the high-priced east and west coasts.

Fannie Mae lost $14 billion in the past 12 months, leaving bondholders and shareholders wondering if their positions were secure. This seriously depressed world markets because Fannie Mae and Freddie Mac were always solid financials – until the U.S. housing bubble burst in 2005. Prices have dropped 30% in the Las Vegas area and across America’s expanding Sun Belt alone.

The Feds to the Rescue

Well, fear not shareholders and bond holders. Your paper is safe. This past weekend, the U.S. federal government took over the operation of these two lending giants, and thus guarantees all of that outstanding paper.

According to different sources, this is great news at the macro economic level, and perhaps it is. The effect will be to inject a little more trust in stock and bond markets, at the very least. Another effect? Federal intervention provides investors with a “floor” below which the cost of money will not fall and a “ceiling” above which money costs will not rise – in other words, market stability.

The pundits praising the move by the feds, however, seem to have a rather short-term focus. Longer term, the impact of shoring up Fannie Mae and Freddie Mac will have a negative impact on the world economy.

Can the U.S. taxpayer manage the added debt load?/font>

The United States is in serious financial straits. The war in the Mid-East has drained the country’s financial capital, driving down the dollar against foreign currencies. Only recently have we seen strength in the dollar – a factor in the declining price of oil because oil prices are measured in US$.

The U.S. is a debtor nation. China and other countries have been buying up U.S. bonds, T-bills and other debt instruments at every turn. In fact, the Chinese are financing the U.S. incursion in Iraq. As a result, outstanding U.S. debt has more than doubled under the leadership of President George Bush.

I believe that the additional burden of homeowner debt will break the backs of U.S. taxpayers.

So what does this mean to you, the Australian business owner?

The move by the federal government to guarantee the debt of Fannie Mae and Freddie Mac will have a positive effect, at least initially. This intervention will heighten confidence and encourage home buying in the U.S. At least that’s the macro-economic theory.

Money will become cheaper as a result. So, if you’re planning a business expansion in Australia, the move by the U.S. government bodes well for the future costs of borrowing. This, in turn, hastens expansion at the local level. Local business owners are more likely to borrow if (1) rates are low and (2) consumer sentiment is positive. A good thing.

But I can’t help but wonder about the long-term effect this additional debt load will have on the activities of American consumers – a driving force in the global economy. The impact on an Australian business may be minimal. Even positive. However, those Australian companies that conduct much of their business with U.S. companies can expect to see a contraction in U.S. consumer spending, which will ultimately have a negative impact on global markets. Bad news for investors and global enterprises.

How can the Australian business owner take best advantage of this move by the U.S. government? Plan expansion around lowering interest rates on business loans. It might take nine to 12 months for the impact to ripple its way down to a local business but the effect will be felt by all.

Longer term, seek to build markets in economies that are growing – China, India, Europe and South America. The shift in global wealth from the U.S. to its competitors in world markets will continue, and while I certainly don’t count out our U.S. business partners and friends (never count out the U.S.), I see greater growth (expansion) potential in less-strapped economies.