The Observation Deck

http://money.cnn.com/2008/09/07/news/co ... 2008090711

Fannie and Freedie "own or back $5.4 trillion worth of home debt".

I can't distinguish between owning home debt and backing home debt.

1 percent of 5.4 trillion dollars is 54 billion dollars. Assuming this home debt represents Real Estate worth 5.4 trillion dollars, it should be possible to generate more interest or rent than the cost of the government bailout.

The financial realities of it are more complex than that. the lenders don't actually own the rights to change a few numbers on terms of the computer file of the loan contract. when the loan contract is defaulted on they don't actually own the home. they get some kind of right to have the sheriff evict the former owner, then liquidate the house or something. It usually sells for much less than the previous book value.

(clicky) Is this good or bad news for the US economy????

Still, the impact of the rescue package on the U.S. government’s fiscal position could ultimately hurt the U.S. dollar, some analysts said, a prospect that helped to send Treasury yields higher

U.S. Treasuries fell sharply in reaction to the Fannie and Freddie bailout. Benchmark 10-year Treasury prices fell, pushing up yields to as high as 3.90 per cent up from 3.71 per cent in late U.S. trading on Friday.

The euro jumped to 155.35 yen up 1 per cent from late in New York on Friday and shot as high as 156.93 yen on trading platform EBS.

The dollar climbed 0.7 per cent to 108.55 yen and was as high as 109.05 earlier in the morning.

Can we call this bailout a failure of capitalism and freedom?

The creation of Fannie and Freddie was a failure of capitalism and freedom. It conferred government support of one industry (housing) over others. And to the extent that Fannie and Freddie received government support (implicit guarantee of the bonds it issued) and insufficient oversight, their failure was a foregone conclusion, merely a matter of when. Next will be the FDIC and the PBGC.

I'm not that old. how were the houses in Lakewood and west Cleveland financed, bought and sold 80 to 100 years ago?

Were renters bombarded with mail from banks and mortgage brokers offering sweetheart loans for 20 to 35 year mortgages? I honestly don't know.

I can imagine a system that might work a little better in terms of avoiding massive foreclosure rates: when someone is interested in buying a house...they have to walk into a bank and talk with someone at the bank. a bank that actually lends the money, and holds the mortgage until it is paid off.

This seems eerily similar to the Savings and Loan meltdown of the 1980s. The Savings and Loan meltdown of the 1980s happened a few years after wall street created new ways of converting mortgages into trading bonds. A lot of folks became billionaires or megamillionaires along the way. but not most savings and loans.

The current meltdown is a more sophisticated, more impressive version of 20 years ago. It is even more impressive than American automobile manufacturers walking right into a sudden increase in fuel prices the same way they did 30 years ago.