Taxpayers Bail Out Fannie and Freddie

It was probably necessary, but the federal government's move to take control of Fannie Mae and Freddie Mac illustrates the flaw in the Bush administration's aversion to regulation: when things go wrong, taxpayers wind up footing the bill. To be more precise, taxpayers of the future will pay the bill, since this will just be piled on the National Debt.

Treasury Secretary Henry Paulson successfully persuaded Congress to give him authority to put taxpayer dollars at risk in July, while downplaying the possibility that he would actually use this authority, saying "if you have a bazooka in your pocket and people know it, you probably won't have to use it." Sunday, he pulled the trigger, and taxpayers are on the hook. The cost will likely run up to $200 billion.

This may achieve the goal of stabilizing the housing market, but the problems of the failed Bush economic policies extend beyond the housing and banking industries. With the federal government's corporate welfare program well underway, we can expect to see other businesses stand in line for a handout.

Automakers Ford and General Motors have already asked for government support, and the Wall Street Journal reported today that GM CEO Rick Wagoner, "will launch a lobbying push this week for billions in government loans to help beleaguered auto makers and their suppliers." They're looking for $50 billion in loan guarantees.

The Fannie and Freddie bailout is important for another reason; to give foreign investors confidence in U.S. bond markets. Under the bailout plan, shareholders of common stock will be wiped out, but bondholders will be protected by the U.S. government (taxpayers).

So, who are these bondholders? Of the $5.2 trillion in bonds issued by Fannie and Freddie, $1.3 trillion are held by foreign investors and governments, including Japan and China, and we cannot let them to take a loss. You see, they're also the largest holders of U.S. Treasury bonds. Japan and China alone hold almost $1.1 trillion in Treasury debt, and the consequences to our economy if they decided to dump U.S. Treasuries would be severe.

With our National Debt approaching $10 trillion, we can't afford to let our foreign "bankers" get upset. Just think of the $200 billion bailout of Fannie/Freddie as a penalty for being a poor credit risk.