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Did Treasury make the right move on Freddie and Fannie?

September 8, 2008

Equity markets around the world surged on the Fannie Mae and Freddie Mac bailout  as hopes rose that the U.S. plan to take control might put at least a temporary floor under troubled financial markets. Together, the two companies back about half of $12 trillion in mortgages in the U.S.”This is a baby step in the right direction,” William Larkin, fixed income portfolio manager at Cabot Money Management in Salem, Massachusetts, said about the plan’s effect on housing and the economy.

Not everyone is convinced. “This euphoria might fade, because Fannie and Freddie are not the problem,” said Christopher Low , chief economist at FTN Financial.

“Their woes are a symptom of a worldwide contraction in credit that may not be cured by the decision.” The Prudent Investor cites how the plan potentially doubled U.S. public debt overnight.

Did the U.S. Treasury make the right move? What’s your view?

Feeling lucky? If you think the Fannie and Freddie rescue plan will impact mortgage rates, wager on your prediction here:

Will the 30-year mortgage rate fall this week after the rescue of Freddie and Fannie?

Comments

Will the managers of Fannie May & Freddie Mac who got large million dollar bonuses be required to give them back or be prosecuted?

How should the Fed handle these folks that left the Taxpayer holding the bill, again?

Posted by Tom Monaghan | Report as abusive
 

Heck, why stop there? Let’s just say Uncle is daddy moneybucks and nationalize the big 3 automobile manufacturers, all money losing newspapers and, by the way, any big bank unfortunate enough to have lost money during the recent “financial crunch”. While they’re at it, how about this taxpayer who hasn’t spent his retirement on expensive car leases and extravagant lifestyle? I guess it’s about time to max out all my credit cards, declare bankrupcy and live the high life on nothing more than an empty promise. No hard lessons here for the average American, uncle to the rescue.

Posted by Dave54 | Report as abusive
 

the current administration is just buying time, putting two dead giants on life support and basically saying that it is up to the next administration to decide what to do with the problem (that´s what Paulson said!. Procrastinating the inevitable does not cure the desease, and the problem is the fiat money system based on debt! They should have included Mises in some Chicago schools!

Posted by topes | Report as abusive
 

I am concerned about the history of how the credit train got wrecked. I believe that a history report “researched and reported by knowledgable people” is in order. I would want to know who the players were, how the decisions were made, and how and if we can begin to recover funds from the profiteers of this scheme.

Posted by Fred Belz | Report as abusive
 

My mortgage company went belly up from the drop off in business. I’m taking responsibility for it. Where is my bail out package?

Posted by Tom | Report as abusive
 

The Republicans want deregulation of everything and privatization of government programs. When they get in trouble because of the lack of oversight they are the first ones standing with outstretched hands asking for a government bailout. The people that run these failed institutions get to leave with a tremendous salary incentive even though they have directed the company in the wrong direction. We should see some punitive action on these CEO’s who perpetuated these scams.

 

Why would they face charges this is not another instance of Enron or Worldcom. The slow home buying market and consumers defaulting on loans. The lack of consumers buying new homes. Not by the Managers covering up the crisis. While many investors have lost a great deal of money would you want your pension package ripped off for something that is not in your control. In no way is this where money was being misused by the persons. A good question for investors with-out $100,000 or greater portfolio’s such as myself and many others, Is when would it be a good time to invest back into these stocks? I saw FNM($.73) & FRE($.88) when will they bounce back ?

Posted by dominic dinada | Report as abusive
 

I don’t see how the government is going to help the economy by taking over fannie mae and freddie mac. I think it was really chicken %h*t they make this decision during the weekend. Everything was speculation and untrue according to both companies regarding rumors that the government take over was going to happen. I think the media really pushed the takeover. I am a common shareowner of both companies. This morning I woke to find the stock at $1 per share. The fact of the matter is that people need proper incomes in order to buy a home. We will continue to see foreclosures because people don’t want to pay double for the house that is selling now for 1/2 the price. People are just walking away without any ramifications maybe a 7year credit blemish. I personally know someone that walked away from their home only to have their uncle buy it back for 1/2 price. Now they are back in their old house. Also, at the height of the house market. Mortgage bankers were after the commission. They would do anything to get someone to qualify for a loan including falsifing income. I think this is something that should be examined. I don’t think it was a brilliant move to have the government step in. I don’t see how it will help anyone.

Posted by beverly | Report as abusive
 

Another bailout for “irrational exuberance” (term coined by the Fed chairman, Ben Bernanke, whose watch this was first allowed to happen upon). We never really paid for the first round (i.e., internet bubble) and the government wants taxpayers to foot the bill for the real estate bubble now. At what point are corporations, financial institutions, and citizens held accountable for their own actions? It seems like it is getting much easier for elected and appointed officials to simply throw more of these “weights” upon the backs of the good-intentioned and honest citizens who live life by trying to do the right thing…

Posted by Ben | Report as abusive
 

It’s wierd how one party is so staunchly against big government interfering in the lifes of people. Government providing medical coverage for all is bad. Bureaucracy they call it. Government providing bailouts for private companies that apparently can’t operate in the “free market” is ok. The “free market” is only good when normal people get fleeced, and the boards get rich I guess. So only “sick” private corporations get Government Medicine. They must like the smell of what their shoveling.

 

The U.S. Federal Government has yet again sided with large corporations and rich investors (including foreign entities) instead of those who bear the largest tax burden. The plan is supposed to stimulate the economy and protect the failing housing market. I have studied economics, business, politics, and history for many years, and it seems to me that bailing out two large companies that created their own demise through poor management is a very poor and purely political move.

Now, I understand that letting major investments tank can be terrible for the economy in a number of ways. Foreign investors lose confidence and are less likely to pump money into our otherwise struggling economy, which spirals us into many types of losses. Bailing out these companies allows them to continue to lend money to people who can’t afford to buy housing otherwise and to companies who wish to expand their construction or other housing related businesses. This, of course, benefits first time home buyers, and various small and large businesses, besides not scaring off large investors and temporarily boosting our failing economic state.

However, the housing market is not our only problem. The Fed wants consumers to keep being consumers and spend money on things they don’t need. Taxpayers do not have to be consumers, but that is how most taxes are paid… through consumption. This has been a regressive system for many years, which makes those who have the least amount to spare pay the largest portion of their income in taxes. Consumerism has been fostered in this country since even before mass media as we know it came into existence. We buy things that we don’t need, because we’ve been convinced by advertising that we do need their useless or nearly useless products merely for our own entertainment.

Because I’m not here to try to change generations of poor living and buying habits on the parts of consumers, I have a much simpler solution to this problem.

Given that the Fed wishes to promote consumer spending, and since so many people were given loans that they cannot afford due to irresponsible lending practices, wouldn’t simply forgiving these loans free up massive amounts of consumer funds to spend on everything else? If these people (including myself, by the way) were relieved of debt that they should never have been able to obtain, and allowed to keep their houses, possibly with a much lower payment rather than no payment at all, their disposable income would increase dramatically, which would in turn strongly stimulate consumer spending. This is a basic economic concept that seems to have been completely overlooked.

Why has this not even been put forth as an option? Likely because stockholders of large corporate entities, which of course also includes smaller investors, have a much larger presence in Washington than do those who would benefit from such a move. Today’s politicians have been purchased by corporate interests, and no longer have any desire to actually govern in a fair and equitable manner, with the largest number of people to benefit from their actions. In this case, those who have money to lose in a bad investment are being protected rather than those who need the money far more desperately, and have not carelessly put their money into businesses with bad ethical histories.

People will continue to be foreclosed upon because they can’t afford loans that they shouldn’t have been given in the first place. These people will become homeless or be forced into more unpleasant living situations than they are in currently, and partly due to ruined credit, will not have the resources to spend on anything that will stimulate the economy.

During Westward Expansion, the U.S. Federal Government had land grabs all over the country. Many people endured extreme hardship to gain this land, of course only after the government so brutally took it away from the natives who lived upon it. Many people have endured less extreme, but very difficult financial hardship to keep the houses that they believed they could afford, but found out later that unreasonable lending practices put them in an impossible situation. These people should not only be kept in mind during this process, but should be given at least a semblance of the respect that they deserve as voting taxpayers! How does this bailout help all the people that are trying to prevent their personal finances from getting out of control?

Even if these debts are not forgiven, couldn’t these people be given at least some small amount of relief? Just two or three months of forgiven payments would be an excellent partial solution to the problem. Many people have the income to afford their house payments if they were given only a small amount of relief. Many more would be able to keep their houses with only a 20% reduction of their payments. Again, why hasn’t this been put forth as a solution? Instead, we protect those who are able to fend for themselves, and not those who truly need the assistance.

All the politicians involved in this clearly do not actually support those who voted for them, and put all their energy into supporting larger entities that can afford to get them re-elected through slick and expensive campaigns that they would not be able to afford otherwise. If one’s prime motivation as a politician is to stay in office, then one has no need to help voters any further than necessary for that purpose. Most people have become so disenchanted with the current political system that they no longer wish to participate, as it creates no benefit for them. Larger entities are so powerful, that people feel helpless against them. Politicians recognize this and take full advantage.

When government becomes an arm of corporate entities, it is called “fascism”, and is what the U.S. has become. Dwight Eisenhower tried to warn us when he left office of the dangers of the military-industrial complex, but then it was already too late to stop the events that have since occurred. It may be naive to think that it was ever different, but we now live in a place where those with vast resources continue to subject those without. The industrial revolution was a major factor in creating this system that is far too similar to a feudal society in that to be able to have any societal benefits, we must participate in a deeply flawed system that almost exclusively benefits those that have inherited wealth. There only exists a small possibility that one may escape that system through talent, skill and/or luck, as it was in medieval Europe.

The “American Dream” is supposed to provide for all who wish to be productive a fruitful life. We do not all need great wealth. Actually NONE of us need great wealth. What we need is a sustainable living environment that takes all of our needs into consideration, and not reward those who would gain great wealth from the abuse of those who cannot protect themselves from those with more resources at their disposal.

U.S. trade policy has allowed business entities that exist and even were began in this country to move their operations to places where no reasonable restrictions on their activities exist. Peoples all over the world have long been punished for not having superior technology or great wealth available to them. Because others have invented more devastating weapons or have more wealth does not make them superior in any way that matters to the enlightened.

Because U.S. and European businesses are legally allowed to chemically pollute and provide untenable working conditions in India, Pakistan, various other locations in Asia, South America, and Africa, they have continued our long-standing human tradition of the strong subjugating the weak. This has been done only in the name of greed, and does not coincide with our stated ideals. Of course, our stated ideals are only propaganda to make us feel better about participating in what is no better than slavery. People who are only a few generations separated from their slave ancestry gladly purchase items that were made by those who are treated worse than their great-great grandparents, thereby willingly participating in the perpetuation of the worst activity we can be involved in outside of torture and genocide.

We blind ourselves to these actions so we do not have to think about being part of the systematic abuse of people who are separated from us only by geography and language. We continue to purchase things that we don’t really need, just because we can, and forget that the people who made these luxuries possible for us cannot afford even basic needs such as food, clean water, and safe living conditions. Every mall and big box retailer in this “great” nation is testament to the fact that material wealth is more important to us than the human suffering and environmental – it creates.

I do not have any illusions about my ability to affect this, nor do I believe that it can continue. Every system collapses, and all things come to an end. I will simply have to wait, and do my best to prevent and alleviate suffering where and when I can. In the meantime, I will continue to complain at the top of my voice about injustices that I see. This most recent “bailout” of two corporate giants that would generate much relief for those in need by simply going out of business has proven yet again that our government is no longer for and by the people, but merely an extension of our increasingly fascist regime… regardless of who is chosen in our sham elections this November.

 

It is the right thing to do. For so many months, the market was inundated with bad vibes and really it has become a confidence issue rather than just housing. This action while not a direct cure for housing, will bring down interest rates and more liquidity to the market. Potential house buyers will now take the plunge and see homes within their reach. It will also help the banks to off load mortgages and may even result in a revaluation of some of their interest sensitive assets so that Q3 write downs will be minimum.

Posted by Michael56 | Report as abusive
 

As Americans we should all speak up and put a stop to this (REVOLUTION). We, and many generations to come, will now shoulder this debt as well as this costly unnecessary war, etc… With the upcoming elections looming it boggles my mind to think that anyone in their right mind could vote for TWO of Bush and Cheney’s Cronies. SPEAK UP AMERICA!!!!!!

Posted by kirk | Report as abusive
 

8 years fo failed government not only in foreign policy but in financial institutions all under a republican stewardship…It is due to the movement good paying jobs and factories to cheap labor overseas..We are now a leading consumer nation with lower production ouput…If people cant find rewarding jobs then they cant pay their debts..It is a double edged sword ..on the backswing it is just as deadly…Our kids have little to look forward to…Greedy corporations were given a free reign..things were much more stable when we had our factories and strong unions protecting us…Republicans destroyed all that,,and they rewarded these corporations by giving them tax breaks..People need to realize that it will not change till we start Taxing excess profits limit these profits to say 5-10% .We cant keep giving corporations welfare benefits..If they fail it would only affect the CEOs and workers in China anyway…Is ok for government selling us out to corporations..?

Posted by c muschett | Report as abusive
 

Thats why we need to drill for more oil. Don’t think for one minute any of that oil Palin wants to drill for will bring down the price of gas. We will be sending the oil to china to cover our debts.

Posted by bob | Report as abusive
 

No. They overstepped their boundaries. But they have been doing that for quite some time now. Just following tradition I suppose.

Posted by jason | Report as abusive
 

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