Fannie and Freddie: Time to become government agencies again?

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The WSJ is reporting that people in the Bush administration are beginning to talk seriously–albeit of course entirely hypothetically–“about what to do in the event mortgage giants Fannie Mae and Freddie Mac falter.”

The view from outside the administration is pretty straightforward, the paper reports:

If a loss of confidence among investors made it impossible for Fannie and Freddie to continue supporting the mortgage market, “the government would have to step in,” said Douglas Elmendorf, an economist at the Brookings Institution in Washington.

“They can’t be allowed to fail,” said Peter Wallison, a former Treasury Department general counsel. “The losses would extend through so much of our economy, and so much of the world economy. There is simply no way that the United States government can let it happen.”

The folks at S&P ran a little thought experiment a while back and estimated that the cost of a Fannie/Freddie bailout would run somewhere between $420 billion and $1.1 trillion. Better that than another Great Depression, I guess. But if it comes to that is there any way we can help pay for it by garnisheeing the investment income of all the ex-Fannie/Freddie execs who raked in zillion-dollar paychecks back when we were under the mistaken impression that the two companies were private enterprises?

Update: In the most exciting development of my career so far, this post has been linked to by the Dutch-language financial media (at least by a blog on the website of the Belgian paper de Tijd). So to my hordes of new readers from across the sea, I say: Welkom, allemaal! Ga je comments gewoon in het vlaams schrijven!