In Case You Were Wondering ...

... what would happen if we didn't nationalize Fannie Mae and Freddie Mac, here's a description by Tyler Cowen, via Kevin Drum.

But let's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

Hmm. That doesn't sound too good.

I must say that it is surreal having a presidential campaign going on while all this stuff is happening. Has anybody even mentioned it, other than to support the action?

Oy!

Sometimes it doesn't pay to get up in the morning. The first thing I read was that a USA Today/Gallup poll has it at McCain 54% and Obama 44%. I'm suspicious of this, especially considering the daily tracking polls, but it's a heck of a way to start your day.

Then I turned to economist Paul Krugman's column in the NY Times. To give you a flavor:

So Fannie and Freddie had to be rescued — otherwise debt deflation would have gotten much worse....

But is it enough? I doubt it.

The current U.S. financial crisis bears a strong resemblance to the crisis that hit Japan at the end of the 1980s, and led to a decade-long slump that worried many American economists, including both Mr. Bernanke and yours truly....

...[T]he effort to contain the financial crisis seems to be failing. Asset prices are still falling, losses are still mounting, and the unemployment rate has just hit a five-year high. With each passing month, America is looking more and more Japanese.

So yes, the Fannie-Freddie rescue was a good thing. But it takes place in the context of a broader economic struggle — a struggle we seem to be losing.

Don't worry, though. Sarah Palin will save us.

Bush Nationalizes Fannie Mae and Freddie Mac - Sort of

Sometimes it helps to get an outsider's view of what's going on in the U.S. This article by the BBC's business editor is pretty matter-of-fact.

The scale of the support being provided by the US Government to Fannie Mae and Freddie Mac is quite breathtaking - up to £110bn and the right to own 80 per cent of each of them.

This may not be conventional nationalisation, but its effect is the same.

Frankly, we don't know what to make of all this. Is the sky falling? Perhaps there's a knowledgeable reader out there who still has ink in his pen? If so, let me know, and I'll be glad to share your insights here.