This weekend we witnessed the biggest Govt expansion into the private sector ever. I'm a free enterprise guy and personally, I don't like Govt involvement in the private sector. Fannie and Freddie where designed as a publicly chartered agencies designed to operate in the private sector, and when things are going well you can make this work, but during down times you cant. They have an internal conflict of interest because they're trying to serve the general public and also be profitable for investors and shareholders. It's like having a non-profit company with shareholders. You can't have it both ways. Earlier this year the US Treasury bailed out Bear Stearns and now Fannie/Freddie. Who's next GM or Ford? My favorite French word is Laissez-faire, and we need to re-introduce this term to Washington.
Having said that, I think the govt had to do this and they had no other choice but risk the entire US economy. The catalyst for this surprise move was PIMCO's announcement that they won't buy anymore mortgage backed securities, (PIMCO is the largest buyer of mortgage securities from Fannie) followed by foreign investors also saying that they are pulling back. Those statements left unattended would have ignited a wild fire in our economy that would have gone out of control. Fannie and Freddie hold too much of our economy within 1 company. A failure of either will crush the markets. You may as well put a big for sale sign on the White house lawn.
Can you say S&L Crisis? This is almost a complete repeat. Our Govt was criticized at the time for getting involved, but in hind sight it proved to be the right thing to do and the cost of the S&L bail out was recuperated through the R.T.C. in the years that followed. By comparison, the Japanese didn't do anything to fix their banking industry and they continued into a 10 year recession.
The Govt actions this weekend established a preferred bond of $200 billion to keep the 2 firms from becoming insolvent and thus renewing investor confidence. The liquidity and investor confidence will keep money flowing and it will bring down interest rates (in the short term). It won't fix the mortgage crisis, but it will make it cheaper to borrow money. The cost to tax payers is yet to be determined, but taking a preferred bond position helps to ensure that the US will get its money paid back over time.
The long term picture is very uncertain and the new administration will have to tackle this issue next year. Secretary Paulson is pushing for down sizing of Fannie and Freddie to be no more than $250B in guaranteed mortgage securities.
Time will tell.
What's you're take on this?
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