Thursday, July 10, 2008

The Financial Crisis is BACK!!

U.S. Considers Takeover of Two Mortgage Giants -
Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

I've written many times that the Perfect Storm must have an economic basis. Economic pain is a required element, even if it seems tangential to policy problems or personalities.

Gas prices, alone, would be enough to sink John McCain's increasingly ridiculous Presidential campaign.

The failure of Fannie Mae and Freddie Mac could easily take down the mortgage market, ending all house buying for a time, and threatening the solvency of the U.S. banking system, which is already in serious doubt. Yet, rescue would involve vast sums, and could well imperil the credit of the Federal government. And, of course, rescue is unmistakeably an act of class warfare.

Good times!

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