It's a bad sign when the federal government decides to prop up an industry who got in trouble through it's own bad decision making....This is a scary example of creeping socialism. When they were created in 1970, Fannie and Freddie were granted a relatively modest $2.25 billion line of credit from the government. Though they have never dipped into it, the implicit government backing has allowed them to finance bond purchases at cheap rates. The whole idea was to boost home ownership by spreading risk around so that mortgage lenders were more comfortable issuing loans knowing they would be backed by Fannie and Freddie. Of course, what this translated into was companies issuing loans to people who weren't credit worthy enough, and instead of risk getting spread out, it actually became heavily concentrated into these two companies.
While neither of these mortgage financiers loan money directly to consumers, they hold the bundled mortgages from the companies that do, and as a result own or back more than half of the nation's $12 trillion in mortgage debt. Nationalizing their debt, on top of the tremendous potential costs involved, would mean the federal government ultimately owning a massive portion of American homes.
John McCain, sadly, has already come out in favor of some kind of bailout for Fannie and Freddie.
On the one hand, the government has no business meddling in the affairs of a private business. On the other hand, if these two businesses go under, the housing market will be devestated. Everybody will be hurt by it. Yet, by propping up these two with taxpayer-funded guarantees, it encourages them to continue to take big risks because the government is willing to give them money to make up for it. If anybody has more insight than me on this, let us know, because I'm not sure what to think.
Hat tip to American Spectator Blog.
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