Too Freakin' Big To Fail

Getting a fix on the size of the problem:

Across the political spectrum, economists agree, Fannie Mae and Freddie Mac, underwriters of fully half the U.S. home mortgage market, are "too big to fail." You can have a debate over whether the collapse of Bear-Stearns really threatened the stability of the entire global financial system and justified government rescue, but you simply cannot dismiss the threat posed by a possible Fannie Mae/Freddie Mac bankruptcy. The total gross domestic product of the world is about $50 trillion. Together Fannie Mae and Freddie Mac are responsible for about $5 trillion worth of U.S. home mortgage debt.

...No wonder David Warsh, an economic chronicler not prone to excitability, kicked off his weekly column on Monday with the following flat statement:

It is becoming clear that the US is indeed facing its most serious economic crisis since 1932.

Remember one of the things that happened as a result of that crisis? Funny thing: Fannie Mae was created, to provide a bulwark for the U.S. housing market, as the monopoly provider of housing loans. Only back then, Fannie Mae wasn't merely a government-"sponsored" enterprise. It was a flat-out government agency. It wasn't until 1968 that Fannie Mae (and a couple of years later, Freddie Mac) evolved into their current bizarre structure, in which they are supposedly private companies, but still answerable to Congress.

...Credit is due to those who can hold to their foundational principles in times such as these. Because one of the most astounding legacies of the George W. Bush presidency, which becomes more profound and historic with the passing of every single day, is how absurd and laughable has become the idea that unregulated markets are a sensible way to run an economy.

...In any case, it's hard to argue that Fannie Mae and Freddie Mac were the primary malefactors in the housing crisis -- although it is worth noting, as Financial Times columnist Clive Crook points out, that the two GSEs did, after all, invent the mortgage-backed security. But the real facilitators of both boom and bust were the fully private, non-government-sponsored lenders who flooded the market with all their innovative new mortgage products, aided and abetted by the investors who couldn't get enough of the riskiest mortgage-backed securities.

Now, like it or not, Fannie and Freddie are indispensable mechanisms for addressing the fallout from the housing bust, and they simply must be kept afloat. Paulson and Bernanke have no choice -- why even have a government, after all, if not to keep the system functioning?

Which brings us to a news item that's become a little lost in all the furor on Monday about Fannie Mae and Freddie Mac: an announcement from the Federal Reserve Bank. ... An example of one of the new rules:

Prohibit a lender from making a loan without regard to borrowers' ability to repay the loan from income and assets other than the home's value.

Ponder that sentence for a moment.

The Federal Reserve has decided it must order lenders not to make loans that they should not make. ... What's most amazing is that lenders have to be instructed in such a basic economic principle in the first place. This is what we have been reduced to: The government telling the "free market": Don't be a friggin' idiot.