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The big bailout of Fannie Mae and Freddie Mac has been big news this week. But what does it mean to you?
GSEs —> TSEs?
Well, the Government Sponsored Entities just became Taxpayer Sponsored Enterprises. The Treasury “bailed” them out, changed their leadership, and is putting Fan & Fred under the management of the Federal Housing Finance Agency. It’s the most radical regime change in global economic and financial affairs in decades, and as economist Nouriel Roubini states “the greatest nationalization in the history of humanity.” He now likens the USA to the USSRA, The United Socialist State Republic of America.
For you, the borrower:
This could mean (slightly) lower rates and greater availability of credit. F&F will now have the cash to buy mortgages from other banks and create more mortgage backed securities to sell off to investors. That means those other banks will have the money to create more mortgages—that way there’s more money moving about the system. So that’s good for a borrower. If you’re a current mortgage holder with a fixed rate, however, you’ll likely see little change.
For you, the homeowner:
Though home prices will continue to fall, the bailout is a potential sign for future stabilization of prices. That’s good for the 1 in 3 mortgage holders whose current mortgage is worth more than his home. Some economists project the market to bottom out as early as the first quarter of 2009; most project early-mid 2010.
For you, the F&F shareholder:
We’re not sure yet. Though Treasury Secretary Hank Paulson did make it clear that the TSE’s “will no longer be managed with a strategy to maximize common shareholder returns.” Sure, change the policy now that U.S. taxpayers are the real shareholders…
For you, the national Federal Debt:
The cost of government intervention has yet to be determined, but it will be huge. Upon takeover, we’ve already immediately injected F&F’s $6 trillion into the national debt. Allegedly, a memo that has been recently circulating among economists at the Federal Reserve projects that Federal debt could reach $23 trillion by mid 2010. (It’s currently $9.67 trillion.)
For you, the everyday taxpayer:
Uh oh. As a taxpayer, you’ll be footing the bill. The bailout basically means Fannie and Freddie will have an unlimited taxpayer-funded credit line. This doesn’t mean our taxes will be increased to bail them out—at least not yet. But it does mean that now our government is further in debt—now indebted to hedge funds, domestic and international banks, foreign central banks, etc. The government already put in $1 billion to F&F, and may put in up to $200B more.
And what if the bailout doesn’t work?
If the bailout does not succeed—that is, it doesn’t help the housing or credit markets—well then we’re in big trouble. If our government can’t inject liquidity into the market, guess who can?
Be sure to read more of what Diana learned today here.
Comments (12)
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Great post.
posted by jdp on 9-10-2008 at 2:54 pm
I don’t know much about national debt . . . but does it really even mean anything any more? I mean, once we reach a few billion $$, it’s kinda all the same. And to whom exactly are we indebted?
reCaptcha: dis- afloat
posted by nutmeag on 9-10-2008 at 3:40 pm
I bought my home a year ago, and although I wish I would have waited and nab a killer deal on the plethora of short sales out there now, I’m confident that (at least in my market) we’ll bounce back up nicely in about 4 years. As for this week’s news, I may want to refinance and save a buck or two.
posted by Johnny Cat on 9-10-2008 at 3:44 pm
This… this… sucks.
I would try to refinance, but we’re upside down now, so no one will touch us. At least we don’t have to pay PMI.
posted by Jason! on 9-10-2008 at 3:51 pm
A fine example of why capitalism should be allowed to run its course.
As for the national debt, some economists say don’t even worry about it. It’s not worth losing sleep over.
posted by Justin on 9-10-2008 at 4:05 pm
Sounds more like a good example of why capitalism has to has some checks on it. BTW, the former heads of Freddie and Fannie got multimillion dollar severance packages. Don’t we all wish we could get huge rewards for screwing up on our jobs?
As far as the national debt goes, what happens to you when you’re in debt. Your money gets tied up paying off so much interest that you can’t maintain your house or buy stuff you need. Next time a deteriorating bridge collapses or we can’t invest in energy or health research or education, thank the national debt. By the way, there are whores in every line of work, legal, science, and economics. Don’t believe everything you hear.
posted by Recluse on 9-10-2008 at 9:29 pm
I’m lucky that I sold my house (APR mortgage and all) before all this started. The market was starting to plummet then, but I only lost a little.
What does suck is I’m now trying to sell a condo now. If I don’t get what I paid for out of it, I’m screwed. Great job, America. Meet me again when I move to South America (got family in government down there – hehe).
posted by NicoNicoNico on 9-11-2008 at 1:00 am
Gee, maybe there was a good reason they put all that regulation on financial institutions back in the 1930s.
posted by BassMan on 9-11-2008 at 8:32 am
It is immoral to pay off business for their failures. Fannie Mae and Freddie Mac took on these risky loans with the understanding the Federal Government would bail them out if things went bad. In a free market companies like this would fail and rightly so. Bad business practice should not be rewarded by bailout from corrupt leeches (the government). If you take away the risk of failure, then what is the point of doing business efficiently or profitably.
And woe betide us if the Federal Reserve runs the presses in order to pay off these debts.
Central planning has been debunked again and again. How many times must this lesson be learned? It seems as though humanity is forever doomed to suffer the machinations of fools.
posted by V on 9-11-2008 at 9:46 am
V- I agree with you. We, as a country should’ve bucked up and let them fail. We are a strong, resillient nation that can face this issue and move past it. Now we have just made things worse for the future. The market would’ve equalized itself in time. I hate to see incompetence and corruption get rewarded on the taxpayers dime.
But I did just name my 2 new goldfish Frannie and Freddie.
posted by motorkitty on 9-11-2008 at 10:16 am
Well said V.
posted by J on 9-11-2008 at 2:07 pm
I dunno… I kind of don’t blame the government for preventing the certain catastrophe, instead of not intervening on the CHANCE that there MIGHT be a worse catastrophe later. Besides, the promise had already been made long ago; wouldn’t it be “bad for future business” to go back on their word now?
Of course, whether the promise should’ve been made in the first place is up for harsh debate. Just tossing in the two cents.
posted by Random on 9-11-2008 at 8:39 pm