Friday, September 05, 2008

Fannie and Freddie Frozen?

(via Washington Monthly) The New York Times is reporting that Freddie Mac and Fannie Mae  have been put on notice that the government intends to take control of the two mortgage giants soon. The head of the Federal Reserve, Ben Bernanke, and Treasury Secretary Paulson, Jr., have apparently decided they had given the companies enough time to clean up their books and restore investor confidence.

Effectively, the government is putting them into bankruptcy and cleaning house. The heads of both companies and their boards will all be replaced. The investors will see their stocks dwindle to nothing. The taxpayers, meanwhile, will be pickup up the tab as the companies are rebuilt; and hopefully confidence in the institutions will be rebuilt as well.

This is one of those "oh, nuts", moments economists were worried about. Why? Fannie and Freddie own or guarantee approximately 50% of the mortgage market, almost $6 trillion. While they are hamstrung by their efforts to rescue what is left of the company, they have not been performing their role of adding liquidity to the mortgage market, their appointed role since their inception (Fannie Mae in 1938 and Freddie Mac in 1970). Less liquidity means fewer loans which results in slower growth.

This move, one of the largest takeovers in history, is far from an example of an economy that is "fundamentally sound", as Sen. John McCain recently said.

Currently the economy is not providing a better life for most Americans. Productivity is up, but wages are stagnant, and job loses are growing. 

Whoever occupies the Oval Office, they will have to confront the shaky economic reality that many families struggle with every day. So far, McCain's comments on the economy do no relate to the world most people see; perhaps reflecting his admitted ignorance of economics. 

There are no perfect fixes, but reducing the burden on those making less, creating a more fair health care system, finding ways to encourage businesses to expand and hire more workers in this country, and not pretending their is no problem would be a good place to start.

- Murphy

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