Fannie Mae and Freddie Mac Salvation

The Federal Government’s bailout of Fannie Mae and Freddie Mac are extraordinary measures, but were critical to avoid a systemic meltdown.   The depth and breadth of the mortgage and foreclosure crisis has implications far beyond the devastating consequences for individual families (as if that wasn’t bad enough).

Behind the curtains of the public stage of the mortgage business are layers of businesses, organizations, agencies, and security backed markets.   Had the government not stepped in with it’s money printing capability to save Freddie Mac and Fannie Mae, we very likely would have seen a serious nationwide economic depression, not a recession.

While I am not a strong advocate of government intervention in private enterprise, I do applaud this move, because it averted a depression, but there is a huge downside for us in the long run, and it is so significant, it may have been wiser for the feds to stay out of this.   I’ll express the downside with these rhetorical questions, “When has the federal government ever managed an organization like a finely tuned violin without breaking the strings?”   “Do you think the feds will ever give Fannie Mae and Freddie Mac back to private industry?”   Think again.     This may be one of the most powerful long-term moves toward socialization of our economy I have seen in my lifetime.   Having the feds operate these two organizations that are responsible for over 70% of our entire mortgage industry is very dangerous.   The implications reach far beyond the horizon of our visibility right now.

By the way, trading stocks on either of these two companies, or worse yet, buying options (calls) hoping to catch a big ride back up in the next few months or year, would be bad positions.

We will get through this foreclosure crisis, but it will take time, and taxpayers will ultimately carry the burden.

Last Updated on September 17, 2008 by Chuck Marunde