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Banana Nation- by Greg Strid

Apparently, the United States is bent on achieving
third world investment grade status. This nation
already sports a trade deficit that would normally
cause the International Monetary Fund (IMF) to
handcuff the government’s fiscal policy. If we were
not a founding member of this institution, it would
probably force our inept leaders to increase taxes
and reduce spending (we might even have to end
one of our expensive wars).

Now, it appears that the Bush administration wants
no doubt to remain with regard to our nation’s status.
With the unveiling of their subprime mortgage bailout
plan, it is now official and undisputed: America is now
the latest- and largest- banana republic.

This plan, all good intentions aside, will cause international
investors to think twice about investing in US mortgage-
backed securities. The main component of the Bush
administration’s plan is a five year freeze on interest rates
assigned to subprime mortgages. This means that the
ultra-low “teaser” rate becomes fixed for five years as
opposed to two. As a result, investors will receive a lower
return from these securities.

This all sounds well and good for the legions of American
homeowners who face crippling resets over the next two
years. But, what about the investors who have purchased
these subprime mortgages as investments? They now own
securities whose value will be impaired by the US
government. This is quite troubling indeed.

The introduction of risk to an investment class causes
the return demanded by investors to rise. The fact
that the rate of return on mortgage-backed securities
may be arbitrarily reduced in the future by the US
government substantially increases uncertainty, and
therefore risk to investors.

This mad dash to fix the mortgage mess could very
well increase interest rates for homeowners in the
years ahead. Far from fixing a disaster that most with
a clue could see coming at least two years ago, this plan,
born of expediency and cowardice, will damage America’s
reputation for transparency and stability among
international investors.

So, lets all celebrate the end to uncertainty as to our
standing in the world. With this grand subprime mortgage
rescue scheme, we have now achieved banana republic status.

© Greg Strid 2007

© 2007 Splendid Marbles.