Fannie and Freddie more important than the disposal of flags

(Updated Below)

One of the big stories to come out the campaigns this weekend was McCain’s false claim that Democrats desecrated thousands of American flags used at the DNC in Denver. I’m glad to see the McCain camp and our venerable news media are focused on the vital issue of how to properly dispose of campaign props.

Meanwhile, back in the real world, two of our biggest financial institutions are so f***ed that our corporate welfare state is going to take them over:

The U.S. government plans to put government sponsored mortgage finance companies Fannie Mae and Freddie Mac under federal control, the New York Times and Washington Post newspapers reported late Friday, in what could be the largest financial bailout in the nation’s history.

The two government sponsored enterprises (GSEs) own or guarantee almost half of the country’s $12 trillion in outstanding home mortgage debt.

Weeee! I guess that housing bubble was real eh guys?

Thanks to the fine folks at Freddie and Fannie I can announce the first winner of the prestigious quote of the weekend award:

“After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.”Dean Baker

If you want to read more, Chris Bowers has an interesting take on how we’re now nationalizing the mortgage industry.

Update
Tyler Cowen explains what might have happened had we not re-privatized Fannie and Freddie:

But let’s say that the Treasury did not support the debt of the mortgage agencies.  The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless.  The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly.  The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value.  Most of the U.S. banking system would be insolvent.  Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot.  The rate of unemployment would climb into double digits and stay there.  Many Americans would not have access to their savings.  The future supply of foreign investment would be noticeably lower.  The Federal government would lose its AAA rating and we would pay much more in borrowing costs.  The deficit would skyrocket.

And I haven’t even mentioned the credit default swaps market.  Well, I have now.

4 Comments

  1. Sheepywoman

    This is what it means: You don’t have great credit but you get a home loan from your local bank. Your local bank sells that loan to Fannie Mae. Fannie Mae collects all these loans into a pool and secures them with bonds where the interest on the bond is paid from your mortgage payments. One problem with the credit crisis was the ratings of these bonds was valued way to high (B+ or better) given the riskiness of the underlying mortgages. Fannie Mae and Freddie Mac provide liquidity on the mortgage market and are willing to buy less desirable mortgages. If they fail, it will be increasingly harder for all individuals to receive loans and the credit market will tighten. Rates on loans will also go up b/c banks are compensating for the loss of liquidity on the loans (right now, if WaMu needs to, they can sell their loans in the secondary market and get the debt off their books very easily). However, I think it’s absolute bullshit that taxpayers are paying for these bailouts without any consequences administered to managers.

  2. Chris

    Thanks for the comment Sheepy… I wish I understood it 😉

  3. Ian

    Chris, read “Personal Finance for Dummies” or something. Seriously, it gives a decent introduction on bonds and similar financial terms.

    I have mixed feelings about all of this. I don’t like that the American taxpayer has to bail out these companies who behaved so irresponsibly. On the other hand, I worry about what would happen if we didn’t. Would it trigger a domino effect that brings the whole economy crashing down a la the 1920s? Probably not, but it could be really bad and I think that’s one reason the federal government stepped in. Companies like Bear Sterns and Fannie and Freddie deserve to go the way of the dinosaur. That’s supposed to be how the GOP sees economics right? Let the market sort it all out. I think that the bail out is OK, but we have to enact some more regulation to make sure that nothing like this ever happens again. I don’t want the board’s of Fannie and Freddie to get golden parachutes on the taxpayers dime either, but I bet they will.

  4. Chris

    Ian,
    That sounds about right to me. It’s probably not wise to let the economy crash down just so leftwingers could make a point about free markets.

    But at the same time, when we do nationalize companies like this, it needs to be done in such a way that punishes the perpetrators and benefits the public. It’s almost inconceivable to think that the terms of this deal aren’t designed to help the wealthy and powerful first and foremost.