Fannie, Freddie, and the Fed: Robbing Paul to Pay Peter

From the Economist (emphasis mine):

After a headlong plunge in the two firms’ share prices (see chart 1), Hank Paulson, the treasury secretary, felt obliged to make an emergency announcement on July 13th. He will seek Congress’s approval for extending the Treasury’s credit lines to the pair and even buying their shares if necessary. Separately, the Federal Reserve said Fannie and Freddie could get financing at its discount window, a privilege previously available only to banks.

The absurdity of this situation was highlighted by the way the discount window works. The Fed does not just accept any old assets as collateral; it wants assets that are “safe”. As well as Treasury bonds, it is willing to accept paper issued by “government-sponsored enterprises” (GSEs). But the two most prominent GSEs are Fannie Mae and Freddie Mac. In theory, therefore, the two companies could issue their own debt and exchange it for loans from the government—the equivalent of having access to the printing press.

That would certainly solve the problem of fewer open-market buyers for the GSEs’ paper.

Comments

Rex says:

Dude,

The Economist hit the nail on the head. The fed is giving Fannie and Freddie access to print their own currency. Also I read that the GAO says because this is considered an “emergency”, the funds to back this bill will not be required to be matched to “spending cuts” or “tax increases” which is normally required for what’s known as “pay as you go” bills which this would typically fall under in any “normal” situation. Instead they will simply add any amounts utilized to the “national debt”!! They are giving Fannie and Freddie the keys to the kingdom which signals to me that this must be a HUGE F@($*&^! mess that has the white house scared to death!

I’m seriously thinking of putting all of my money into gold!!

Yes – the bill includes an increase in the debt ceiling to $10.615 trillion – that’s an $800 billion increase (or +8%).

Fannie and Freddie are the last backstop – the only vehicles left for manipulation.

Save the housing, kill the savers. Save the dollar, kill the housing.

Damned if you do, and damned if you don’t?

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