As an act of crisis management, the US government takeover of Fannie Mae and Freddie Mac, the mortgage finance giants, was a reasonable and reassuring move. It ensures the flow of mortgage credit and is likely to reduce mortgage rates, which are important steps towards the eventual recovery of the ailing US housing market.
And it does so while putting taxpayers first for future dividends or money that may be earned when the firms are reprivatized, holding out hope that the bailout costs may someday be recouped. Beyond the immediate crisis, however, the takeover raises disturbing issues that may get lost in the tumult of the moment.
The need for an explicit bailout underlines the economic vulnerabilities of the US. In July, Congress gave the US treasury secretary Henry Paulson unlimited authority to pay the debts of Fannie and Freddie and to shore up their capital, if need be. Yet, investors the world over continued to doubt the companies’ viability, shunning their securities or demanding unusually high interest rates on loans. In effect, investors deemed the government’s commitment to Fannie and Freddie as either insufficient or not credible — an extraordinary vote of no confidence that, in the end, led to the bailout.
There is no single reason for the lack of confidence. But investors have good cause to be concerned about the deep indebtedness of the US, about the nation’s apparent political unwillingness to restore its fiscal health and about the ability of the government to responsibly make good on its commitments. A pledge of the full faith and credit of the US still means something. That’s why the markets responded favourably to the takeover. But investors’ refusal to accept a promise to act is another sign of the need to reverse the fiscal mismanagement of the Bush years.
The US must acknowledge that its deep indebtedness is especially dangerous in times of economic crisis. The level and stability of American interest rates and of the dollar are now dependent on the willingness of foreign central banks and other overseas investors to continue lending to the US. The bailout became inevitable when central banks in Asia and Russia began to curtail their purchases of the companies’ debt, pushing up mortgage rates and deepening the economic downturn. The bailout is new evidence of the need for better regulation of the American financial system. As the housing bubble inflated, the Bush administration often claimed that America’s unfettered markets were the envy of the world. But, in fact, they have sowed mistrust.
The cost of the bailout needs to be carefully monitored. Fannie and Freddie own or back nearly $800 billion of generally junky mortgages, and some of those will inevitably go bad. So, it is reasonable to assume that the cost could easily near $100 billion. There may be ways to make back some of that money later, but for a long time, the bailout will divert resources from other needs.
Senator John McCain and senator Barack Obama have both voiced support for the bailout, which shows good judgement. But what the next president will need to worry about, and both candidates need to talk about, is the depth of the country’s economic problems. It will take discipline and sacrifice to address them.
©2008/The New York Times
Edited excerpts. Comment at email@example.com