Fannie and Freddie Bail Out -- How Will It Affect You?
Wednesday July 23, 2008
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The bailout also includes:
- $3.9 billion in CDBG grants to help homeowners in poor neighborhoods.
- Approval for the Treasury Department to buy shares of Fannie and Freddie's stock to support stock price levels and allow the two to continue to raise capital on the private market.
- Approval for the Federal Housing Administration (FHA) to guarantee $300 billion in new loans to keep 400,000 homeowners out of foreclosure.
- About $15 billion in housing tax breaks, including a credit of up to $7,500 for first-time buyers.
- An increase in the statutory limit on the national debt by $800 billion, to $10.6 trillion.
- A new regulatory agency to over see Fannie and Freddie, including executive pay levels.
What It Means to You
This legislation is designed to restore trust in Fannie and Freddie, and therefore in the U.S. housing market. It will probably mean that the housing slump will not get worse, and could even end sooner than without the bill.Unfortunately, it is all being funded by the U.S. Government, which already has a $9 trillion national debt. In fact, the provision to allow the debt level to be raised to over $10 trillion is acknowledgment of who exactly will be footing the bill for the bailout. Global concerns about the sustainability of this debt continues to depress the dollar and raise the price of imports. This bailout dwarfs the 1989 Savings and Loan Crisis, which "only" cost the taxpayers $124 billion.
Comments
Generally agree, although I take issue with one statement you made. You wrote, “This legislation is designed to restore trust in Fannie and Freddie, and therefore in the U.S. housing market.” The problem with this logic is that Fannie and Freddie’s troubles weren’t the cause of the slowdown in the housing market in the first place. They were a symptom, but not the cause.
The real cause was due to the fact that buyers simply believe that the prices are too high and are staying out of the market. The amount of buyer demand is less than it was before the whole housing boom began, while the supply of housing is at record levels. That has to mean a continued drop in prices.
And WHY are prices too high? They’re too high because the Federal Reserve System has been creating tons of money out of thin air for more than a decade, and this is what really fueled the housing boom and made houses appear to be worth more than they really were worth.
What we’re seeing is the “bust” side of the “boom and bust” cycle that is generated and perpetuated by a fiat monetary system managed and controlled by the Federal Reserve Board of Governors.
Hi Walt,
I agree with your comment that lack of faith in Fannie and Freddie did not cause the housing bust. I also agree that the Fed has been pouring liquidity into the market for years.
However, I don’t think we can blame the Fed 100% for causing the bubble. There’s that little thing called greed - on the part of homebuyers, housing speculators and mortgage corporations - that drove the bubble as well.
Kimberly
Walt,
You stated the problem well and succinctly.
Fed has been pumping at the liquidity pedal:
a) Economic uncertainty policy in the early to mid-1990’s.
b) Post 9/11 temporary freeze in capital flows.
Loose fiscal and monetary policies have created excessive liquidity in the market. The bubble is a true bubble in the carpet. The bubble will keep migrating from one place to the other unless it is completely diffused.
Unfortunately, with out mop up of the excessive liquidity the bubble will go find new destinations. It will not wither away. The only way to remove the bubble is to have a higher Fed funds rate while excessive liquidity is removed from the process.
The credit crunch has somewhat mitigated the immediate start of a new bubble. However, when the credit crunch goes away and liquidity improves, we will see this bubble again.
We have seen the new bubble…it is in commodities. Now that bubble is starting to decline, and perhaps move back into the stock market…too soon to say.
Kimberly