While politicians debate the identity of the “pig” at whom Barack Obama took a poke, the nation has stored up another problem for whichever candidate is unfortunate enough to inherit the White House come 2009. Hank Paulson did what he had to do, or at least what he thought he had to do, when he ordered a government take-over of Freddie Mac (a client) and Fannie Mae. Unless the government made explicit its guarantee of the two agencies’ debt, foreign holders of their IOUs would dump them. Indeed, in recent weeks Asian central banks sold off $27 billion of these agencies’ securities.
The two Government Sponsored Enterprises, GSEs as they are best known, support about 80 percent of the mortgage market. If they could not borrow to make new funds available, the housing and credit markets would most likely have seized up, exacerbating our current economic woes.
