Monday, July 14, 2008

Right Here in River City

While I am all for everyone being to keep their homes in this crashing market I just want to know how much it is going to cost me and my fellow taxpayers.

Via Bloomberg:

Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.

Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

The announcements followed weekend talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.

The operative and most troubling part of that statement above is the phrase "buy unlimited stakes". This means if stockholders don't respond positively on these statements and start bidding up the price of Fannie Mae and Freddie Mac then the Treasury will buy as much as necessary to keep the companies afloat. This may be a good thing. I don't know as I am not a financial expert. The Fed can print money but sooner or later we taxpayers are going to be on the hook for paying it back. Take the current U.S. Government debt of 9 trillion bucks and add to it the $5 Trillion in liabilities carried by these two you just effectively more than doubled the national debt. That's just a little troubling especially when you note that even with the promise of someone with deep pockets promising to shore up the stocks the market for both these babies was off 5% for Fannie and 8.3% for Freddie today. These guys are down 75% for the year!
You will note, however, that when things were looking good neither of these companies shared with you but when things are bad because of mismanagement you get the bill. As Krugman says, "Privatize the profits, socialize the liabilities". We are so screwed!

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