Fannie and Freddie: The Real Losers Are….Your Grandkids!

The Times business section offers the penetrating insight that the F&F mess could cost somewhere between nothing and $100 billion and that, furthermore, $100 billion is more than $25 billion.  In another newsflash, several Americans will die today, while others will be born:

WASHINGTON — The proposed government rescue of the nation’s two mortgage finance giants will appear on the federal budget as a $25 billion cost to taxpayers, the independent Congressional Budget Office said on Tuesday even though officials conceded that there was no way of really knowing what, if anything, a bailout would cost.

The budget office said there was a better than even chance that the rescue package would not be needed before the end of 2009 and would not cost taxpayers any money. But the office also estimated a 5 percent chance that the mortgage companies, Fannie Mae and Freddie Mac, could lose $100 billion, which would cost taxpayers far more than $25 billion.
That would all be bad enough, except it’s incorrect.  Taxpayers won’t pay anything.  Taxes will not go up, and government services will not go down as a result of a F&F bailout.  Instead, our government will sell debt to other governments, this time at an exchange rate which terribly disadvantages the U.S. in the deal.  Taxpayers will have nothing to worry about, unless we’re in such deep yogurt that we actually have to print the money instead of borrow it (“monetize the debt” being the polite phrase).   In that case, we’d get what we deserve, which would be higher inflation.  Instead we’ll pass it on the tab to our kids and grandkids.  At least the debt will be dollar-denominated.
The second thing the Times leaves out is that, even under the “drastic ” scenario it presents, Treasury is asking for a blank check to protect equity holders to the tune of the $18 billion combined market value which investors currently hang on the two companies.  Why there’s not an angry mob insisting that any bailout squashes the equity to zero is beyond me.
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