If you throw all the products we buy and the services we use in one basket, then add up the price tag, that's the Gross Domestic Product, which is the primary metric economists use to assess the economic health of a country or region.

The easy part of calculating GDP is the calculation itself: C+I+G+(X-M)=GDP. Got it? No? Well, add Consumption, Investment by companies, Government purchases, and then take the product of eXports (calling it 'E' would lack sexiness) minus iMports ('I' was taken). Viola! GDP.

Still don't get it? Well, knowing the components helps. Consumption is the biggest component, and it's a tally of the cost of all the goods and services we buy. Investment is what companies spend on the real assets they own, plus the value of the inventory that we haven't gobbled up through consumption. Government purchases are what the Feds pay money for (whether it be highways or fighter jets, though big social programs, like welfare, aren't counted). And then we calculate the difference between the goods and services we¿re sending to other countries and the stuff we're bringing in.

Good. That explains it, except there's a catch. Inflation has a habit of distorting the numbers, so economists talk about either Nominal GDP or Real GDP. In fact, Real GDP isn't necessarily "real" for most folks, since it takes any inflation out. Nominal GDP includes the effects of inflation. (There's something called the implicit price deflator which is a calculation using the two, but we'll spare you the details.)

So, now that we know GDP, why do we want to? Well, it's good to compare different markets. And watching the trend shows whether a given economy is growing (good), stagnating (not so good), or shrinking (very not so good). When GDP goes down two quarters in a row, we're officially in a recession.

For the record, GDP is released at the end of each month, with most reporting ¿preliminary¿ data for the previous month. But you won't get final GDP numbers for the fourth quarter of a year until the very end of the first quarter of the next year. After all, it's not an easy number to calculate.

Home / Markets / Economy

Monday, September 08, 2008

The Winners and Losers of the Government's Mortgage Bailout

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Dunstan Prial

FOXBusiness

Now that it’s official, it’s time to assess the winners and losers in the federal government’s bailout of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE).

Axel Merk, manager of the $400 million Merk Hard Currency Fund, said the question of who loses is easy.

“You,” he responded, meaning “we,” collectively the U.S. taxpayer.

Merk’s senior adviser William Poole, a former head of the St. Louis Federal Reserve, put the final price tag for the rescue at $300 billion, a figure Merk described as “conservative.”

“That’s $1,000 per taxpayer,” Merk said.

The explanation for the cost is simple--these two huge companies have failed, and in order to keep them up and running, the government plans to use taxpayers’ money. Lots of it.

The other big losers are Fannie’s and Freddie’s shareholders.

Now that the government has put the companies under a conservatorship overseen by a newly created regulator, the Federal Housing Finance Agency, shareholders are likely to swallow billions of dollars in losses.

The companies’ shares, already battered as the U.S. housing market has collapsed in the past two years, tumbled further Monday on news of the takeover.

In addition, annual dividends of about $2 billion distributed to shareholders have been eliminated, a move that is certain to put further pressure on the stock prices.

Another loser is the broader housing market, which is not expected to see any immediate tangible benefits from the rescue.

Indeed, critics of the bailout have called it a Band-Aid, likening it to similar programs offered by the Bush Administration, such as the Bear Stearns rescue, as the housing crisis and credit crunch have worsened.

These programs, critics say, have propped up stock markets for a few days--but haven’t offered long-term relief to homeowners or investors. Home prices are expected to continue falling, and foreclosures are likely to continue to climb. The Fannie and Freddie bailout does nothing to fix those systemic problems.

But there are winners.

And Greg McBride, senior financial analyst at Bankrate.com, said there might be as many winners as losers.

They include “anybody in the market for a mortgage,” he said.

As foreclosure numbers have hit record highs, frightened lenders have been charging higher interest for mortgages (when they approve mortgages at all).

But now that the government has stepped in and guaranteed the health of the two largest purchasers of U.S. mortgages, experts feel lenders are already easing their lending restrictions, including prohibitive interest rates.

Mortgage rates are down half a percentage point since the rescue was announced, according to McBride.

Had the government not stepped in and propped up the ailing companies, “the mortgage market would have ground to a halt,” McBride added.

Other winners include Freddie and Fannie bondholders. These are primarily mutual funds and foreign investors whose investments will remain strong because under the bailout both companies bonds are guaranteed.

Still, some observers were hard-pressed to put a positive spin on the move. While the bailout maintains two important cogs in the housing and financial sectors, the larger causes of the sustained economic downturn have not been addressed--notably, a softening economy brought about by a weak housing market.

Those problems are aided, but not solved, by the rescue. Meanwhile, the big picture seems to grow bleaker.

“Bailouts are getting more and more expensive. This time $200 billion is necessary with more to come. And that’s just to ‘save’ housing. What about the automotive industry? That will cost $100 billion next year to bail out,” said Merk.

“These bailouts will add up. The next (presidential) administration may get its trillion-dollar deficit. The winners will be the irresponsible ones who piled up on debt. The losers are retirees that have been saving and see their purchasing power erode,” he concluded.