And if you want the Government to regulate the hell out of these two companies than they should be barred from being public companies.

Wow… not even close! The Fannie Mae is at least clearer :)

Second, it is becoming extremely difficult to deny the huge role that the continuous(!) loosening of credit standards since the mid-90s played in this crisis. And anyone who missed all the (more than a decade long) rhetoric about “expanding access” and so on simply wasn’t paying attention.

Our political leaders really are scum. The only question is whether incompetence outweighs malice or vice versa.

Speaking of incompetence cannot be done without mentioning Bush. I used to be moved when Bush shed a tear over fallen soldiers. Now I think, “Don’t cry you *#$!, you sent ‘em there. He/she would still be alive if it weren’t for you, so *@*! cut it out.”

Federal Home Loan Mortgage Corporation = FHLMC = “Freddie Mac”

Still, it’s comforting to note your undying loyalty to the Party line. Send Charles Schumer a check. Everything will be fine.

Hehehe… good question!

We also need to realize that Fannie and Freddie are not the villians here. Paul Krugman showed this pretty clearly: http://www.nytimes.com/2008/07/14/opinion/14krugman.html?_r=2&oref=slogin&oref=slogin

The issue with these two entities is that they fund themselves more cheaply than private sector alternatives, because of the implicit government guarantee. Although never formalized, nobody ever believed the government would allow them to fail. And we see that now: while share prices are collapsing, they are still able to roll over debt. Of course, this guarantee benefits consumers as it means lower mortgage rates across the board, and it fosters more stable, longer, safer, fixed-term mortgages (Note that countries without government-backed entities find it hard to do this– in the UK, a “fixed-term” mortgage means 3 years, no more).

With a situation like this, though, moral hazard is always a risk– with government backing, the managers could take crazy risks, knowing they will be bailed out. But there is a simple solution to moral hazard: regulation. And Fannie and Freddie were tightly regulated with respect to the risks they could take. They were not in the subprime business. And, as Krugman notes, in response to some governance issues, regulators placed restraints on Fannie and Freddie just as house prices were taking off, curbing their ability to lend.

So why are we in trouble today? Well, the private sector securitization market died, Fannie and Freddie have become even more dominant. Also, the sheer scale of the housing prices means that all classes of loans are being affected, not just high risk ones. Another issue is that its capital is far too low — and that is a result of the political machinations that this post describes.

So what’s the solution? Well, the key problem is that rewards are privatized and risks are socialized. The government role is non-transparent (witness the administration go around in circles to avoid any mention of socialization– which is what is happening!). The cleanest solution is to make what is implicit explicit. Wipe out shareholders and bring Fannie on Freddie on government books. And keep them very tightly regulated.

$168 billion. Wow.