Covering the economy's fanny

The takeover of Fanny and Freddie by the federal government announced over the weekend has been described relentlessly in the media as a bail out. This is a major distortion of what has happened. First, these are private companies owned by shareholders, and these owners are essentially being wiped out. Stock that was worth $70 about a year ago is now selling for 70 cents. that means that 99% of the value held by the shareholders has been erased. It is hard to call this a bailout.

What actually has happened is that the debt structures built by Fanny and Freddie have been recued by the feds. This debt serves the function of supplying liquidity to the mortgage market. In English, this means that Fanny and Freddie function to make sure that there are ample funds available for mortgage lending in the US. The result is that mortgage rates are lower, the effects of individual defaults are spread so that they are not unduly burdensome to the original lender, housing prices are supported and the home construction industry has more sales with the resulting increase in jobs and incomes. So, putting it clearly, the feds stepped in here not to bail out the owners of the companies or Wall Street, but rather to protect the US economy from a possible disaster of major magnitude.

It is worth remembering that in 1929-1932, the depression was brought on by the failure of a large number of banks and the resulting contraction of the banking system which dried up investment and liquidity. Indeed, at one point, a bank called the Bank of the United States failed and Europeans, thinking that the US central bank had failed, pulled billions of dollars from the US banking system. The American government did nothing but watch as the banking system collapsed. Actually the plan of then President Herbert Hoover was to raise taxes to make sure that there was no federal budget deficit, a plan not too far from the current plan announced by the Obama campaign. In any event, the price of doing nothing to save the banks was a depression, the likes of which had not been seen before or since.

I find it strange that the media insist on calling this a bail out when it is not. but then, I guess I should know better. The level of economic knowledge displayed by the media is so low that one wonders where they find reporters that ignorant.