President Bush's “ownership society” was never supposed to come to this.
With the government takeover of Fannie Mae and Freddie Mac, U.S. taxpayers now essentially own the bulk of the nation's mortgage market.
This ownership could even lead to a big increase in the national debt – to $15 trillion, up from just under $10 trillion now – if things don't work out as planned.
The government's forced rescue of the mortgage finance giants over the weekend could have many unintended consequences, even though those in both parties – including the presidential nominees, Republican John McCain and Democrat Barack Obama – have greeted it as a necessary evil toward easing the nation's housing and credit woes.
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If all goes as planned, it should help make home loans cheaper and more readily available. It also may slow the rate of foreclosures and possibly halt house price depreciation. But that's a big maybe.
The deal has refocused political attention on the frail U.S. economy, with both candidates and their running mates back on the campaign trail talking about the economy after their respective nominating conventions, and with Congress returning to town for at least a three-week session.
“These companies are so big and so interwoven into the financial markets and our financial system, we had no choice,” Treasury Secretary Henry Paulson said Monday in a round of TV interviews. “A failure by either one of these companies would cause great havoc in the economic system.”
Paulson said he could not yet estimate the potential burden for taxpayers.
Officials announced Sunday that they would seize both Fannie and Freddie, temporarily putting them in a government conservatorship, replacing their chief executives and taking a government financial stake in the companies. The move could end up costing taxpayers tens of billions of dollars.
The two together own or guarantee more than $5trillion in mortgages. That's an amount roughly equivalent to half of the entire national debt, and would represent a huge, if potential, increase in the overall U.S. indebtedness if counted among the government's liabilities.
For now, U.S. officials are trying to emphasize the temporary nature of the takeover and minimize the possible risk to taxpayers.
But some economists say it could take years to work though the nation's housing problems. By then, the takeover could even dwarf the savings and loan crisis, when the failure of more than 700 S&Ls in the 1980s and early 1990s cost taxpayers some $125 billion.
“I think this is a bigger financial crisis, said Mark Zandi, chief economist of Moody's Economy.com. “Instead of nationalizing an industry like the S&L industry, we've effectively nationalized the mortgage market.”
Fannie, Freddie and the Federal Housing Administration account for backing or issuing roughly three-quarters of the nation's mortgages, with commercial banks playing a decreasing role since the housing-credit crisis began.
This weekend's forced rescue follows the government-sponsored sale of investment bank Bear Stearns to J.P. Morgan Chase in March, with the Federal Reserve agreeing to guarantee $29 billion of Bear Stearn's assets; the administration's proposals that the Fed be given a beefed up role in regulating financial markets, and earlier government efforts this summer to prop up Fannie and Freddie.
And even more government intervention could be down the road, including possible additional help for the U.S. auto industry and tighter regulation of the credit-card industry.