A delicate balance in the Freddie and Fannie action “deleveraging hurricane”.

[RedEarth]

A delicate balance in the Freddie and Fannie action
By Mohamed El-Erian

The levees in New Orleans held fast as hurricane Gustav landed last week, sparing the city from the physical devastation experienced under Katrina. And had the levees fallen, the human tragedy would have been significantly reduced as most of the population had already been evacuated from the city.

This situation stands in stark contrast to the devastation that a deleveraging hurricane continues to wreak in the US and other parts of the world. Unlike New Orleans, the levees of the global economy have broken, one after another.

Also unlike New Orleans, a significant part of the global economy still lies in the path of this hurricane. Having caused havoc in the financial and housing sectors, the damage now encompasses sinister economic storms that are starting to rage in employment, consumption and investment in the US and abroad.

.......

Over the next few weeks we will get a lot of information as to whether these conditions are being met. If they are, this latest levy will prove effective in stopping the deleveraging hurricane and allowing for clean-up operations to start – including reconciling markets to the new realities on the ground and leading to the establishment of better preventive measures against future hurricane formations.

If, however, the conditions are not met, the global economy will experience further significant devastation that will go well beyond housing and the financial sector. In this scenario, consumers residing in highly leveraged economies such as the US and the UK will feel even sharper and more prolonged pain, followed by those in several emerging economies.

http://www.ft.com/cms/s/0/33ddd0ac-7cf7-11dd-8d59-000077b07658.html

[phantom power]

1. They can try to "balance" it any way they want. It's going to unwind.