Conservatorship of GSEs is bad for the dollar and inflation

I might have egg all over my face quicker than quick about my $150 oil call. It seems the Fannie-Freddie bailout chatter is spooking stock markets, currency markets and the oil market. This is going to be a volatile day.

The dollar dropped to a one-week low against the euro and headed for a weekly loss before a report forecast to show U.S. consumer confidence declined this month.

The currency fell against the yen and reached a 25-year low versus the Australian dollar on concern losses at financial firms including Fannie Mae and Freddie Mac may deepen. Canada’s dollar decreased against all of the other major currencies after a government report showed employers unexpectedly eliminated positions in June. Crude oil rose to the record.

Bloomberg, 11 Jul 2008

Also, my speculation about a bailout ‘deal’ with the GSEs as willing participants is strongly disputed by Yves Smith at naked capitalism. She has a point. After all, the GSE management loses out in a bailout. Nevertheless, this scenario has been under consideration for some time, GSEs willing or not.

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