Saturday, September 06, 2008


The US Government is finally going to nationalize Fannie Mae and Freddie Mac, formalizing a relationship that has been clear since the inception of those two firms. Both Brad DeLong and Chris Bowers do not get it. First Chris:
The problem I have is with the incredible cognitive dissonance surrounding "big government" in our national political discourse. Even as we have reached national consensus on nationalizing industries, which is the literal definition of socialism and big government, politicians of every party keep talking about "small government" as though it were a virtue. I mean, the day after the Republican convention, which included countless attacks on big government, the Republican administration goes out an nationalizes a major industry.
Fannie and Freddie were always parts of the Federal Government. The mortgage industry is as "socialized" as it ever was, and this move has not changed the size of the government one iota. Now Brad:
I don't see the necessity for nationalizing Fannie and Freddie right now. They both are still cash-flow positive, right? If they fail to rollover their bonds and become cash-flow negative, the Treasury can finance them with preferred plus warrants, right?
Wrong. They need to roll over their bonds at a price that treats them as being part of the government, not any price, for them to remain in business. The ambiguity over that position has finally been cleared up, exactly as everyone knew it would.


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