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

Regulation helped stave off real disaster, writes Krugman
By Jason Farago,  Newser Staff
Posted Jul 14, 2008 8:32 AM CDT
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)
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(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."