Monday, September 08, 2008

Freddie and Fannie RIP

This administration has had an ideological axe to grind against Fannie and Freddie from day one. They particularly didn't like the fact that they performed well as quasi-government entities for decades. But they are essential to the operation of the US home mortgage market (especially in times of crisis) and have been since they were created. The governments' steps to takeover Fannie Mae and Freddie Mac yesterday should be understood in this context. I wrote back in March (on the heels of the BearStearns blowup) that eventually the government would have to get involved.

Perhaps the administration also saw this, but waited for a chance to "get involved" in a way that fundamentally changes the nature of Fannie and Freddie. They found one. Hopefully it marks a big enough shift in the credit markets that the housing market can get back on its feet. The administration has committed to pumping a lot more liquidity into the mortgage market (up to $20 B/month if I read the plan right). That extra liquidity is one thing if the market bottoms out in the next few months, but what if this drags on for another year or two?

On the other hand they could have pulled the plug on Fannie 6 months or even 3 months what was gained by waiting?


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