Fannie Mae and Freddie Mac

Well its happened – as I thought in my previous blog back in July – see here , the U.S. Federal Government has taken control of these two Mortgage giants to stop them from failing – see the original story here from Sam Zuckerman of the San Francisco Chronicle.

Henry Paulsen, US Treasury Secretary – said the following a the time of the announcement.  Quote: “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe” continuing he said “A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.”  Here is Paulsen’s actual Press Release of the Takeover..

Back on July 18th, I said the following:-

The damage to the perception and hence the stock price of Fannie Mae and Freddie Mac in the USA, also the IndyMac Bank where the fallout has prompted investors to dump the stocks of many mortgage lenders, precipitating the steepest one-day decline in banking shares since the late 1980’s, these are just symptoms of the bad paper, and a total lack of confidence.  Fannie Mae and Freddie Mac have to wear the huge losses brought about by the failures brought about by the sub-prime.  The US federal government has to bail them out – if they went down the losses would be in effect a six time multiplier of the Australian GDP – no small amount.  Fannie Mae and Freddie Mac, which own or guarantee about half the $US12 trillion in home loans in the USA, but is this bail out the only one for these companies and others – how about the rest of the Finance and Banking sector.  What happened for instance if these 2 critical organisations, Fannie Mae and Freddie Mac were nationalised?  If this situation continues they will have to be – as although they the US Federal Government will have to have some control over the companies, as well such a move, which has not happened since the depression would be the first constructive move telling the world that the US Government guarantees and has faith in the future of the US economy – they will have no choice. So long as these two enterprises continue to bleed money at this rate.  Such a move would have flow on effects into the Stock Exchanges as well as the strength of the US dollar.

This move has been so obvious as to be painful – aside from the gaping hole that it will add to an already astronomical debt in the US budget forecast, for years to come – it is a very good move – aside from the obvious assistance that it gives to the two companies in question – and literally 50% of the $12 Trillion US mortgage market – to me it proves that the US Government still does have faith in America – and is prepared to put its money where its mouth is – even if it has to print the money.

This will have immediate positive effects not only in the domestic economy of the USA but will strengthen the US exchange rate and increase confidence in the ability of this so far inept executive and its (words fail me) President to do its job, that is manage an economy.  The only negative effects I can see are perhaps an effect on inflation – but fairly small – and for crying out loud – stop fiddling and let the economy – which is a truly dynamic macro concept come to its own level.

This is a positive and courageous step – about time.

To those in the US economy who said they should fail – I feel for you guys and girls – aside from the dramatic financial turmoil – where in this time of credit crunch are you going to be able to source that sort of money – but there are more important considerations here – and that is a political and a “face” if you like – what the US Government has done – will be the best single act in this disastrous Bush administration to support the US and the US economy…

If President Bush is looking for a legacy this may well be it.



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