Let The Bailout Begin

Fannie and Freddie, meet Sir Henry, your white knight:

Treasury Secretary Henry Paulson swung 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 announcement followed crisis 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 in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.

As Chris Dodd explained on Blitzer today, all the regulations needed to rein in the mortgage industry are already on the books. The regulators were asleep at the wheel, they let the lenders run wild, and in the end, we all paid for it. So the cheap mortgages and the social benefits of home ownership are far outweighed by this bailout. Fannie and Freddie held half of the mortgages in an industry that piled on risk without creating a cushion should increasing numbers of the loans go bad. Krugman's column on this today points out that this government rescue was inevitable, and that the broader economy won't be affected. After all, they are government-sponsored entities which are insured in the event of failure or difficulty. But there's a cumulative effect on consumer confidence when you see Bear Stearns and Fannie & Freddie and IndyMac going down one after another. The other problem here is that refusing to force investors to pay for the consequences of their actions will institutionalize bad behavior. I agree with Atrios:

Actually, Fannie and Freddie can be allowed to fail. Their shareholders can eat shit, and they can be reconstituted as a wholesale federal entities. There are zero reasons that I can think of that we should have shareholder owned entities which "probably but not necessarily" are going to get a government bailout every time they need it.

Both short and long term we might think that having such creatures exist to be mortgage backstops is a good idea. I probably agree with that. But there is no reason for them to be publicly traded companies.

In other words, they should have been nationalized all along, as a guarantee against just such a crisis. But that would conflict with the "privatize everything" view in the Republican Party.