Sunday, September 07, 2008

Fannie, Freddie..Fucked

So Fannie and Freddie have been fucked to the bone - well almost. But thanks to the Fed, both the companies should be able to see light at the end of the tunnel in the coming months, or years. All the lenders involved in the subprime mortgage crisis screwed everybody, and because of that, Fannie and Freddie have been dealing with nightmares since July 2007. Both the companies would never have thought that they would one day be really penalized for their MBSs. I just wonder how it feels when a nightmare comes true.

From CNN: The Fed has almost 80% ownership of Fannie & Freddie now. Dividends have been put on hold, and all "charitable" activities of the company are under review. Good job Fed, I say. Charity begins at home.

I am just wondering what would have happened if Fannie and Freddie had declared bankruptcy. After witnessing the subprime mortgage crisis in July last year, and the chaos that it created in America, F & F's bankruptcy would have caused a chaotic situation hundred times larger in magnitude. But desperate situations demand desperate measures, and that is why the Fed intervened - at the right time, I guess.

GSEs like F & F in a capitalist economy are a good example of socialism (in a capitalistic economy) and social interventionism (in the 30s and 60s perhaps), and it has its own advantages and disadvantages. Its presence made sure that people belonging to lower income households got to own houses. It's absence would have saved trillions of dollars, but would have also made the housing market much more aggresive - if there was someone big enough to replace F & F.

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