You wouldn't know it if you watched the news!

I couldn't agree with you more, Dhakks.

How is free market economics supposed to correct market imbalances if the government bails out corporations every time they mess up? This is socialism for corporations! We either believe in free markets, or not.

Two interesting revelations I came across in NPR:

• The first is that a significant part of Fannie and Freddie's capital is deferred tax credit, i.e. the present value of taxes that won't need to be paid as a result of losses that are carried forward. The problem is that these don't constitute assets that can be drawn upon in case of a crisis like this. Which basically means that the crisis was much more dire than imagined at first.
  

• The second is that the combined outstanding debt of Fannie and Freddie is roughly $5 Trillion. Yes that's trillion, not billion. That is more debt at stake than any company in history. It's more than the debt of every country in the world except the US. Hell, its more than the GDP of every country in the world except the US. In fact, the crash of the Japanese economy would arguably be less of a strain on the world economy than Fannie and Freddie.
  

The aggregate cost of this debacle to the tax payers depends on how much of the loans will actually prove to be bad. Estimates range from $25BN to $200BN.

What has astonished me today is that effectively the US government has taken on $5 trillion in credit exposure upending a fundamental argument made by Reagan when privatizing these behemoths. The world, by general consensus, just avoided what is possibly the closest it has come to a global financial meltdown since the Great Depression, and the news has focused on lippygate and Lou Dobbs spent an hour on a tirade against illegal immigrants. This is surreal!

Fannie Freddie Sammie

I didn't think of it but I couldn't have said it better.

I am a little perplexed by the common perception (media, public) that capitalism is somehow supposed to be painless.

I don't know enough (the scale of numbers is beyond grasp) to say that these firms, as others before, "had to be saved" or not.

But any time you mess with the principles of risk and reward, specifically how "you earn it", you get a few possible outcomes (1) you're setting bad precedents (2) you typically postpone the problem (for another generation) rather than solve it (3) it comes back to bite you in some other form, sometimes even worsened in magnitude.

The common refrain is that a gradual pain is better than a severe shock for the economy. I buy that. And I don't.

Oh, by the way, Warren bought it. I don't think the alternative (letting them collapse) was ever on the table. Just not possible.

Also, interesting article on Warren's concern with potentially more bank failures here.

Fannie and Freddie, what do you think?

The Government took over Fannie Mae and Freddie Mac over the weekend. Paul Krugman argues in his column that this signifies the failure of the Fed intervention. What do you think? Is this a failure of the Fed strategy? What does it say about the economy?