Posted by: Michael Mandel on July 13
What we saw this weekend was the world’s biggest temporary sandbag. With the waters rising and about to swallow Freddie and Fannie, Paulson and Bernanke stepped in with—what? A bunch of promises. The Fed promised Freddie and Fannie access to the discount window, and Paulson promised an expanded (but unspecified) government credit line for the giant companies, with the vague promise of equity purchases.
These vague promises may keep Fannie and Freddie from sinking beneath the waves for the next week, or month, or two months. But the Paulson/Bernanke sandbags aren’t high enough to save the companies if the economic flood waters really start to rise. If the economy slumps, mortgage delinquencies will rise, and Fannie and Freddie will find themselves in deeper and deeper trouble.
In fact, we know what’s really needed—a massive $400-$500 billion government bailout of the U.S. housing sector. A straight infusion of taxpayer money, right into Freddie and Fannie and the banking system in general.
But the multi-billion infusion of funds can’t happen in the months before a hotly contested presidential election. Neither the Democrats or the Republicans want to be put in the position of “bailing out” Wall Street. It just won’t happen.
So Paulson is being forced to use smoke and mirrors. Yes, the credit line is expanded, but no, he won’t say by how much. Yes, he might buy equity,but he won’t say how much. But just read it here first: Presidental election = no agreement on a large scale bailout.
That means the next president—Obama or McCain—will come into office at a time of a very bad economy. His first act: Save the housing sector with a lot of big bucks.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.