All the major news networks and family I know all spout that the two mortgage giants cant be allowed to fail. They hate that the tax papers have to foot the bill, but that there is no other choice. If Freddy and Fannie did go under, like they should, what happens to home prices in the county and the mortgages that people have through them.
Thanks
The Chinese, Japanese and everybodyelseholdingFMbonds would take a 50% haircut. Bailing out Fannie = bailing out the Japanese central bank.
And they are explicitly not moral obligations of the US gov't - see red box warning on FM bond prospectus. Seems to me like Mr Paulson & Mr Bernanke work for the Chinese & Japanese.
If Fannie and Freddie Mac were allowed to fail there would probably be a short recession as the market corrects itself. But the politicians will bail out Fannie and Freddie Mac which will mean there won't be a recession in the short term, but there will be a big depression in the long term because the bubble will eventually burst but the market correction will be longer and more painfull.
Disclaimer: I'm no economist but had the same question, so I did a little reading.
It appears what the Federal Reserve and the Treasury will bail out are not the firms Fannie & Freddie (F&F) but the investors in their mortgage backed securities, this includes China, Japan, etc... Up until now, there was no guarantee the US would back these investments but it was suspected that if they fail the US would back the investments. When the US decided it would back these investments by the bailout, you could say the implied guarantee became an explicit guarantee. Ginnie Mae is sort of like F&F except that it is run by the government and has an explicit guarantee. These two didn't.
If this bailout costs $1.5 trillion (it could be more) to pay off investors that would amount to around $5,000 per US citizen. We won't receive a bill in the mail but the Fed and Treasury would likely inflate the economy by printing the money, lowering the value of the dollar - which increases prices and decreases our savings.
Now if the govt cut the leash and let F&F fail, these securities would have to be sold at a fraction of their value to whoever would buy them. Home prices would plummet further (as they should) which would cause capitalization and loan-to-value ratio to drop further which would likely result in more firms & homeowners defaulting. But after all the carnage, home prices would likely return to a reasonable level.
That's my unprofessional opinion and I could be wrong. I'd be interested in reading what other people have to say.
I think it's more on the order of $5m per citizen.
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
Thanks for the explanation.
Ron Paul predicted the F&F troubles back in 2003:
http://www.lewrockwell.com/paul/paul128.html
Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing.
My question is this: why the housing market specifically? How did Paul know the credit would be invested in the housing market?
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
xSFx: My question is this: why the housing market specifically? How did Paul know the credit would be invested in the housing market?
Because Fannie and Freddie specifically work within the housing market? How is it not obvious it would not affect/be invested in the housing market? Perhaps I don't understand your question...
I was wondering what would happen if the economy continues to nosedive and the housing market becomes even more disastrous? The bailouts were designed to provide confidence to investors. In fact, confidence is the only thing holding up the financial system. The widespread expectation that government can save us from every crisis is the only thing preventing people from withdrawing their savings from banks, preventing countries such as China and Japan from selling off our debt, etc.