4 ms·

can somebody say why this is necessary? what would happen if the gov. wouldn't have taken over? would the fed. gov bail out general motors, boeing or google if

• ctkrohn 18y ago
  Actually, the government agreed to guarantee some of Chrysler's debt in 1979, and to buy large quantities of Chrysler vehicles: http://en.wikipedia.org/wiki/Chrysler#Government_loan_guarantees http://en.wikipedia.org/wiki/Chrysler#Government_loan_guaran...
• felipe 18y ago
  Right! If our economy relies so much on housing to the point that it is a threat to the entire economy, then it shows that we didn't have a solid economy in the first place. We are seriously compromising the well-being of future generations of this country in order to bail-out over-consuming house-owners and fat-cats in Wall Street. Absolutely outrageous.
• wheels 18y ago
  http://www.economist.com/opinion/displaystory.cfm?story_id=12009702 http://www.economist.com/opinion/displaystory.cfm?story_id=1... http://www.economist.com/finance/displaystory.cfm?story_id=11985948 http://www.economist.com/finance/displaystory.cfm?story_id=1... An extremely oversimplified answer is that it would hurt confidence in the dollar, which would further damage its status as the foreign federal reserve currency, which would cause further inflation in the US.
  • richcollins 18y ago
    It seems to me that allowing them to fail would help the dollar by tightening credit.
    • wheels 18y ago
      When foreign federal reserves switch their reserve stash from dollars to something else, the dollars are basically "created" on the market as one currency becomes instantly less available and the other instantly more available.
• etal 18y ago
  The U.S. mortgage system works like this: Freddie Mac and Fannie Mae make the housing market more liquid by buying up mortgage loans satisfying reasonable criteria. Other banks can issue mortgages and then immediately resell the loans back to Fannie and Freddie. This makes it easy to get a mortgage through any bank if you have a reasonable financial history, because the other banks don't have to serve out the loans they issue. Since Fannie and Freddie were implicitly backed by the Fed, they were able to leverage their capital much more than a normal bank in taking on loans -- only a few percent of their issued loans were backed up by real money. These beasts were designed to be too big to fail, and in the unlikely event that they did fail, the companies' histories indicated that the Fed would step in. This is a huge advantage for the two companies, and over the years they essentially squeezed other banks out of the prime mortgage market. The entire housing market therefore depends on the ability of Fannie and Freddie to buy up the mortgage loans that other banks issue. Without them, the pool of available capital to support those loans would suddenly shrink dramatically, meaning much fewer loans can be issued. Meaning none of us could buy a house for the next few years. The Fed is stepping in because (1) they created both companies originally, though they cut the umbilical cord at some point; (2) they're still tied into the companies' finances in various ways; and (3) crippling the housing market and setting off a chain reaction of more bank collapses is not something this economy needs, particularly in an election year. There are a few other government-sponsored enterprises that would also get this sort of rescue if needed. Boeing isn't one of them, but as a matter of national security, I doubt the government would allow them to fail. (I still can't quite explain why Bear Stearns got bailed out, but they did.)
  • gills 18y ago
    The prospectus for every bond issued by these agencies explicitly states that it is not guaranteed by the United States. The housing market does not need Fannie and Freddie. What it needs is a stable provider of liquidity (a broker for the secondary mortgage market). Let Fannie and Freddie fail, and simultaneously introduce an explicitly-backstopped liquidity mechanism/agency.
    • etal 18y ago
      True. It's unclear exactly how the federal government "implicitly" backed Fannie and Freddie, besides occasional congressional meddling and the companies' history as GSEs, but other financial agencies and investors treated them as if they knew the government would step in if there was a problem -- and it turns out they were right.
• gills 18y ago
  No, I can't say, because it wasn't necessary. We're all looking at Paulson's right hand waving about conservatorship, but missing his left hand; his left hand is bailing out the foreign central banks who bought agency paper and later threatened to dump treasury paper if their agency paper was not backstopped. So now the shareholders get hosed but the foreign central banks get their bonds paid for by the American taxpayers.
  • MaysonL 18y ago
    the foreign central banks get their bonds paid for by the American taxpayers. Given that the bonds are backed by mortgages taken out by those very same American taxpayers, it doesn't seem all that unfair. (And all those T-bills, as well as the mortgage bonds, were bought by dollars paid to overseas businesses to buy lots of cheap goods for American consumers).
    • yummyfajitas 18y ago
      I rent, so it doesn't seem fair to me. I lose while foreign banks and homeowners gain.