September 8th, 2008 by john 
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By now I’m sure you have heard about the latest unprecedented government move to take over Freddie Mac and Fannie Mae. Treasury Secretary Henry Paulson announced the news on Sunday. It is estimated that 50% of the 5.4 trillion in US mortgages are held by Freddie and Fannie. Many experts agree that they are too big and important to fail. So here we go again with another tax payer bail out.
What Our Government is Saying
- On Sunday, Treasury Secretary Henry Paulson said “Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe.”
- He went on to say “A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance.”
- President Bush chimed in with “Americans should be confident that the actions taken today will strengthen our ability to weather the housing correction and are critical to returning the economy to stronger sustained growth.”
What This Means To You and Me
- Interest Rates could drop by as much as 1%
- Could make it more affordable to purchase a home for those with good credit
- Could help some homeowners sell their homes
- Tighter lending standards, will make it harder to borrow for those with less than pristine credit
- Borrowers viewed as risky could pay more in fees
- Dividends will be cut to shareholders
The Skeleton in the Closet Nobody is Talking About
This government bailout will ultimately cost tax payers billions. Many experts say if the housing market does not turn around soon, it could cost tens of billions. Being that a bailout of this magnitude has never been done before, no one knows the real implications to our long term financial stability or how much it will actually cost “We the People”. If you checked out the documentary I.O.U.S.A. you know that any money the government spends is money we don’t have. We are borrowing against our future. The real burden of all these government bailouts will be placed on future taxpayers, our children and grandchildren. However, perhaps in this case we really don’t have any other choice.
What do you think? Is it a good idea for the government to completely take over and bail out these giant home lenders?
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{ 11 comments… read them below or add one }
Hmm not sure if this is the best course of action but they had to try something. The housing market is a flat out disaster.
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John reply on September 8th, 2008 11:30 pm:
Tim, I’m not sure it was the best course either. But the stock market sure loves it, the DOW rose 290 points today! Go figure.
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good stuff here John. I personally think this bailout is too early, Fannie Mae was able to raise the capital needed, Freddie hadn’t yet but given a bit more time probably would have. Of course there is so much we the public do not know, so in the end this may have been a move that had to be made. I do however think whatever the reason for the bailout, the benefits that are supposed to come from this are overstated, this move will maintain the status quo nothing more.
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John reply on September 9th, 2008 11:30 pm:
Thanks Bridget. Good observations here. I believe the bailout happened too early as well. It should have been reserved as a last resort. Of course, as you pointed out, we [the public] may not have all the facts and this might have been absolutely necessary. We will probably find out in 10 years that we were teetering on economic destruction.
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can’t help but appreciate what could be benefits to the regular joe (lower rates, kick in the pants to get home sales turning around), if this actually comes to fruition.
a little alarmed that the government was the one to have to step in…
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John reply on September 9th, 2008 11:33 pm:
I sure hope these consumer benefits come to fruition. It would be a crying shame to spend tens of billions of taxpayer money and get nothing to show for it! Of course, isn’t that how it usually works?
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I still don’t know for sure what to think about this massive development. What I DO know is that these bailouts are opening the door for more and more corporations to expect the government to fix their problems.
Case in point: Ford, Chrysler, and GM. Even though their massive problems are entirely self-inflicted, they are trying to convince Washington to use taxpayer money to help them out (they already have some). What a joke! Taxpayers don’t receive any benefits whatsoever during these company’s successful times, but have to help them out because of their stupidity?? Enough is enough- in some cases, like Fannie and Freddie, letting them fail could be catastrophic for our country. However, this developing trend of socializing losses while keeping gains private is ridiculous.
Sorry for the ramble…
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John reply on September 9th, 2008 11:41 pm:
Hey, no problem Blake, ramble on! Good stuff! I agree, these big companies essentially are able to do away with the downside risk. It’s kind of like a teenager doing reckless things, knowing Mom and Dad will bail them out if things go south. It creates a false sense of security, enabling the CEO’s to take unjustifiable risks. AND when it all goes to hell in a hand basket, they still get their multi-million dollar bonuses! Pathetic!
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I understand the reasoning behind the bail-outs, but do not necessarily agree with them. I know our slow, dragging economy needs a serious boost, but at the cost of what. If it boost the housing market great, but is it only going to be temporary. What would stabilize things would be to create confidence in the consumer. The only way to do that is figure out how to make sure we stop losing jobs, and start creating some new ones. But how to do that, I just don’t know, I wish I did.
I do know what really makes me mad, this morning on the new they were saying the CEO of Fannie is still set to receive a $12,000,000.00 bonus and the CEO of Freddie a $ 9,000,000.00 bonus. If this is true why is the government bothering to save the idiots.
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John reply on September 9th, 2008 11:55 pm:
You make an excellent point Eric, the mortgage crisis is only one of many problems we are facing right now. Job security, which lets face it equals “life security” is also an enormous crisis on the horizon. We have lost millions of “real” high wage jobs in this country over the last several decades. Most seem to have been replaced with lower wage service jobs. I don’t know exactly how you fix this either. But hopefully, whomever we elect president in a few months will actually show some cahoonas and try to address the situation.
And yes it is absolutely disgusting for these guys to walk away with any bonus at all, let alone millions. Can you imagine if you were able to get a huge bonus at work for totally screwing up? “Johnson, sales are in the toilet, employee morale is at an all time low and we will be filing for bankruptcy next week. Here is $100,000. Buy your wife something nice.” WTF?
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Sadly, the time for the government to act was years ago. They allowed the lenders to finance iffy loans to borrowers who had no business attempting to buy a house with their weak credit and debt ratio. I’m all for everyone wanting to own their own home, but as Mick Jagger (and House) says, “Ya can’t always get what ya want.” Will this latest bailout help or hurt? I don’t know, check back with me in five more years.
peace,
mike
livelife365
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John reply on September 11th, 2008 12:17 am:
How true Mike, but I think many people today think they can always get what they want. Time will tell how this all plays out.
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“It’s kind of like a teenager doing reckless things, knowing Mom and Dad will bail them out if things go south. It creates a false sense of security, enabling the CEO’s to take unjustifiable risks. AND when it all goes to hell in a hand basket, they still get their multi-million dollar bonuses! Pathetic!”
haha so true….
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This sounds a little scary to me and I am glad and appreciate you putting it in clear terms!
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John reply on September 11th, 2008 9:16 pm:
You’re welcome Heidi. I hope you found the info useful. Thanks for all your visits!
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Great breakdown of what is going on with this situation. Thanks for the commentary!
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And today they are working on the future on Lehman Brothers. Finally, the government is starting to show some backbone and being standoffish about backing a bailout, but we will see on Monday – or sooner.
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John reply on September 13th, 2008 5:20 pm:
Yes this one should prove interesting. I heard Paulson today say that he does not want tax payer money used in this bailout….WTF? Do we have a bailout angel that they have been keeping from us? Or perhaps a money tree…ah, of course the Treasury.
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That’s bull making tax payers pay for the bail out.. it just shows what the government will do to protect it’s best assets/
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John reply on September 16th, 2008 7:53 am:
Yes, it does seem unfair for tax payers to have to pay for these greedy SOB’s mistakes. But on the flipside, not bailing them out could be worse for the overall economy. Kind of a catch 22!
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