The Standard-Examiner Opines on the Fannie/Freddie Bailout Dilemma

Added bonus: an instructive supplementary article and a revealing video piece

The Standard-Examiner this morning finally weighs in on the Fannie-Freddie bailout situation, which has dominated world financial news since the past weekend. And the editorial board gets it mostly right, with savvy observations such as these:

America, you just bought giant ownership stakes in two privately held companies that hold and/or guarantee half of all U.S. home mortgages. How does it make you feel?
Over-extended? Sick to your stomach?
Us, too. This home-foreclosure crisis was getting scary long ago. Now it’s getting worse. [...]
The Freddie and Fannie watchers are growing nervous because it is suspected the companies don’t have adequate cash reserves to weather this housing trough. According to a report by The Providence Journal newspaper, the $83 billion Freddie and Fannie hold in reserve is a pittance of a rainy day fund when stacked against the companies’ combined $5 trillion in debts.
So, the federal government — the White House is taking the lead, but the movie is supported by congressional Democrats — is stepping in to buttress Freddie and Fannie against anything like a collapse. Congressional Republicans have so far been reluctant to go along, calling the plan “socialism” and worse.

So far, so good; but then the Std-Ex goes "soft in the knees":

We wonder, though. Allowing Freddie and Fannie too close to default could damage financial markets around the world, not to mention perhaps a cascading smashup of the U.S. markets.
In a situation that could potentially be so grave, we wonder: What other option is there?

The other option, of course, would be to allow market forces to solve the problem, which is what's supposed to happen in a so-called "free market economy."

And granted, the failure and market liquidation of Freddy and Fanny would cause serious short-term disruption, as these entities moved through bankruptcy court, where viable assets would be efficiently identified and liquidated, and the nonviable ones written off. And yes, this would be a severe blow to G.E.S. stockholders and other financial institutions who hold all these entities' hokey $5 trillion in debt paper.

The aftermath of the mortgage market meltdown will however be painful, regardless of which approach becomes public policy.

So once again we ask the question: Is turning the American taxpayer into what's known in investment circles as "the bagholder" the better of the solutions?

Just for kicks, we'll segue into another solution offered by one of our favorite financial sites, "The Onion": Recession-Plagued Nation Demands New Bubble To Invest In

As an added bonus we provide this humorous and topical video clip, which was contributed by Gentle Curmudgeon in one of our lower comments sections last night:


We thought it would be useful to launch into the coming weekend with something light.

Consider this an open topic thread, if you like.