Krugman is of the opinion that even given the Fannie/Freddie debacle the economy will not collapse. He's the economist of course, but I still not convinced. It seems to me that tart Socialism is going to start to look real attractive now that its near closing time and captain Capitalism is obnoxiously staggering around from his all night binge making big messes everywhere.
Even given the announcement by Treasury Secretary Henry M. Paulson Jr. of a plan Sunday to help shore up Fannie Mae and Freddie Mac, there's an incredible momenta at play in other market arenas outside of housing that could add chaos to the fix.
Much more of this and the citadel of free-enterprise may be soon be visited by those lovely villagers bearing torches.
Fannie, Freddie and You
By Paul Krugman
And now we've reached the next stage of our seemingly never-ending financial crisis. This time Fannie Mae and Freddie Mac are in the headlines, with dire warnings of imminent collapse. How worried should we be?
Well, I'm going to take a contrarian position: the storm over these particular lenders is overblown. Fannie and Freddie probably will need a government rescue. But since it's already clear that that rescue will take place, their problems won't take down the economy.
Furthermore, while Fannie and Freddie are problematic institutions, they aren't responsible for the mess we're in.
Here's the background: Fannie Mae -- the Federal National Mortgage Association -- was created in the 1930s to facilitate homeownership by buying mortgages from banks, freeing up cash that could be used to make new loans. Fannie and Freddie Mac, which does pretty much the same thing, now finance most of the home loans being made in America.
The case against Fannie and Freddie begins with their peculiar status: although they're private companies with stockholders and profits, they're "government-sponsored enterprises" established by federal law, which means that they receive special privileges.
The most important of these privileges is implicit: it's the belief of investors that if Fannie and Freddie are threatened with failure, the federal government will come to their rescue.
This implicit guarantee means that profits are privatized but losses are socialized. If Fannie and Freddie do well, their stockholders reap the benefits, but if things go badly, Washington picks up the tab. Heads they win, tails we lose.
cul: Is anyone else seeing all this as particularly absurd? Am I imagining it or is my butt really sore? With a rule like that, its no wonder the capitalists consider the market free; they're certainly not paying for it. One thing for certain, its incredibly instructive to be able to see the degree of screwage when the wallboard has to come off because of major plumbing leakage.
But back to Mr K: