The US government has finally taken control of Fannie Mae and Freddie Mac over the weekend, thus ending speculation about the fate of the two troubled mortgage finance companies, which either own or guarantee $5.4 trillion in mortgages.
There are two lessons to be learnt.
The first is a moral one: This intervention is more proof that the US financial industry is free to earn big profits in good times but is protected by taxpayer money against losses that pile up in bad times.
The second lesson from this episode is economic: The huge credit crisis and the deflating housing bubble continue to chew into the entrails of the world’s largest economy.
The global stock markets have responded positively to the weekend package. But this is premature optimism, since the problems in the world economy continue to be deep-rooted, with slowing growth, rising inflation and a financial sector in deep trouble. And there continue to be fears that other major Western banks and financial institutions will run into trouble as housing prices decline further and economic headwinds worsen.
True, the US economy has proved to be far more resilient than expected despite all these factors. It has officially stayed clear of recession one year into the global credit crisis. The US economy grew at an annual rate of 3.5% in the second quarter of this year.
But there is still enough cause for worry. The most recent data shows that unemployment in the US is now 6.1%, a five-year high. House prices continue to decline. And high fuel prices have eaten into discretionary incomes.
One reason the US economy has managed to expand despite these domestic problems is that exports to the rest of the world have shot up thanks to a weak dollar. The other reason is that the cheques that US citizens got as part of their government’s fiscal stimulus package have helped hold up domestic demand.
But US exports are being shipped into a slowing global economy; Japan and the UK are already dangerously close to recession. And the fiscal stimulus is a one-time booster. The months ahead promise to be far more difficult.
Is the takeover of the two US mortgage giants a sign that there is more trouble in store for the US financial sector? Write to us at email@example.com