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Pay Up for Fannie and Freddie

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I will begin this blog entry with an allegorical play in three acts -- starring you as the protagonist!

Act I

Your deadbeat brother-in-law shows up at your door and explains that his business, Joe's Exclusively Deep-Fried Seafood and Mortgage Hovel, hasn't been doing so well. You aren't surprised, given that his company is extremely indebted and has been mired in accounting scandals for years.

As a result of his troubles, he has gotten himself into so much debt that he has no chance of paying it off. He asks you and your spouse for a loan.

Act II

Your spouse, sympathetic of course, suggests that you lend Deadbeat Brother-In-Law (DBIL, for the remainder of the play) some money. You suggest to your spouse (Spouse) that since DBIL is unable to pay his current debts, loading him up with yet more debt isn't really a good solution. You also note the unlikelihood of being paid back in such a scenario.

Act III

Without asking you, Spouse dips into the joint checking account and lends DBIL the money anyway. Spouse also makes a big investment in the stock of DBIL's insolvent Mortgage and Deep-Fried Seafood business. But Spouse tells you not to worry: it's in everyone's best interest, and anyway, DBIL wasn't actually having any financial problems in the first place! Also, the stock pays out its dividends in fried clams!

Fin

Well, if you imagine that Fannie Mae and Freddie Mac are the Seafood Hovel, Treasury Secretary Hank Paulson is your spouse (yikes), and you are the U.S. taxpayer, then the above play (except for the part about the clams) pretty much actually took place over the weekend.

As suggested here on Friday, the government announced yesterday that it will further advance the creeping socialization of the U.S. financial system by bailing out mortgage giants Fannie Mae and Freddie Mac. (They didn't use those exact words).

I'll let Bloomberg provide the non-allegorical version:

Paulson, speaking yesterday on the stairway to the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in the companies and lend to them, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

I should note that my use of the word "bankrupt" is a bit of editorializing on my part. After all, Paulson and company -- the same people who insisted all along that there were no problems in housing (as also noted on Friday) -- continue to tell us that Fannie and Freddie are actually not at risk of going broke. I guess that's why they held an emergency Sunday press conference to announce that they'd be throwing taxpayer money at Fannie and Freddie hand over fist.

-- RICH TOSCANO