U.S. Bailouts Now Total Almost 35% of GDP

First it was the banks. Then Fannie Mae and Freddie Mac followed by AIG, Citigroup and now possibly auto companies, the home builders and the legacy airlines.

Increasingly, the American government is becoming Corporate America’s largest investor. And with that big shareholder responsibility comes a new wave of government regulation in 2009 as Congress moves to unseat greedy banking executives and curtail salaries and bonuses. More government won’t be good for business.

The U.S. government now owns or operates approximately 35% of the entire economy’s production or gross domestic product (GDP).

The Feds now control banking, investment banking (what’s left of Wall Street), swaths of insurance, mortgage lending and will probably loan huge chunks of taxpayers’ funds to Detroit’s Big Three, the airlines and anyone else who qualifies as a systemic threat to the U.S. economy.

Now it’s time for consumers to get some relief.

On Monday, the Treasury announced plans to boost consumer loans by introducing another in a series of measures to unclog lending. The government will spend $800 billion dollars to finance mortgage debt purchases, effectively hoping to bring long-term mortgage rates down. That strategy worked wonders on Tuesday as fixed-rate mortgages tumbled after remaining elevated for more than 12 months despite aggressive Fed rate cuts. The 30-year fixed-rate mortgage fell to 5.81% this morning from 6.08% four weeks earlier.

Under TALF (Term Asset-Backed Securities Loan Facility), the government will lend up to $200 billion dollars of certain holders of high grade securities backed by assets tied to student loans, credit card loans, auto loans and small business loans. Some of these backstops or guarantees will be funded by TARP, or the Troubled Asset Relief Program.

If this whole exercise in bailouts and emergency funding has you confused, join the club. The U.S. Treasury under Hank Paulson has caused more confusion than clarity on vital market measures to boost a depressed consumer and a fractured banking sector. TARP and TALF don’t address the root of the problem – a bear market in real estate and an ongoing decline in housing values.

Until the bleeding stops in housing, it’s fair to assume that derivative based mortgage-backed securities will continue to remain under pressure and largely illiquid with few bids. Nobody wants to purchase a sliding asset.

Judging by Tuesday’s solid rally in mortgage-backed bonds and most other fixed income markets, the government’s relentless efforts to unclog credit markets is beginning to work. We still have a long way to go before this credit crisis is over; the good news is that it’s probably a good time to start accumulating some riskier forms of credit – battered since September and still trading at huge discounts compared to their long term price trends.