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September 8, 2008 11:16:10 AM CDT

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Fannie/Freddie: It's Bad, but It Could Be Worse

Posted Jul 14, 08 8:32 AM CDT in Opinion,  Business 

(Newser) – The government's move to shore up Fannie Mae and Freddie Mac has led to new fears about the state of the American economy—but don't worry too much, writes Paul Krugman in the New York Times. Fannie and Freddie are problematic institutions, but compared to the actions of big banks who bought up repackaged subprime mortgages, the two mortgage giants have been relatively prudent.

Fannie and Freddie, as "government-sponsored enterprises," have always had an implicit guarantee that the government would step in if things got bad. But while that assurance might have led to a few bad risks, tight regulation—of the kind of absent for the big banks—has limited the fallout. Fannie and Freddie's big problem, now, is their insufficient capitalization: with not enough money on hand, "even a small decline in the value of their assets can leave them underwater."

Source New York Times

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This May 2, 2007 file photo shows the Fannie Mae building in Washington. The U.S. Treasury and the Federal Reserve announced steps Sunday, July 13, 2008 to shore up mortgage giants Fannie Mae and Freddie...   (AP Photo/Manuel Balce Ceneta, file)
Freddie Mac Corporate Office are seen Sunday, July 13, 2008 in McLean, Va. The U.S. Treasury and the Federal Reserve are announcing steps to shore up mortgage giants Fannie Mae and Freddie Mac. Fannie...   (AP Photo/Pablo Martinez Monsivais)
In this Thursday, July 10, 2008 picture, U.S. Treasury Secretary Henry Paulson testifies on Capitol Hill in Washington before the House Financial Services Committee hearing on systemic risk and the financial...   (AP Photo/Manuel Balce Ceneta)
Treasury Secretary Henry Paulson testifies on Capitol Hill in Washington, before the House Financial Services Committee hearing on systemic risk and the financial markets.   (AP Photo/Manuel Balce Ceneta, File)
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subprime mortgages  • economy  • Fannie Mae  • Freddie Mac  • mortgage  • regulation


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