Housing Market Takes Turn for the Worse
In case you failed to pick up on the news this weekend, the Treasury Department is bailing out Freddie Mac and Fannie Mae. This is not something that the Treasury Department really wanted to do at all. Sec. Paulson had hoped that simply telling investors that the federal government was willing to back these organizations would be enough for people to remain content that they are safe institutions.
Unfortunately the federal government learned this week that the accounting within these companies had some errors. Accounting errors are not something that breed any type of ease or content in an investor. In fact it’s something that can lead to the rapid evacuation of investors from any company, let alone one that’s already lost billions due to bad underwriting and investments. Throwing some shoddy bookkeeping into the mix is only going to add fuel to the fire and this helps to explain why the federal government had to step in and bail out these two institutions.
That said, I am currently not convinced that a bailout of these two institutions was necessary. It’s true that stockholders of these two companies will receive very very little for their investments if they receive anything at all. However it would appear that the federal government of the United States caved to foreign pressure to bail out these companies as several large foreign investors held significant exposure to these companies. One of those large foreign investors was the country of China. I do not fully understand the ramifications of what would’ve taken place if these two companies have not been bailed out by the federal government. However, I do know that when you enable an investor to invest in a company without having to worry about the repercussions, you are not fostering a healthy market. By enabling China to invest in Freddie Mac and Fannie Mae without any risk of loss, we are not creating a situation whereby a free economy can benefit. We’ve essentially given a risk free investment to China at a cost to taxpayers of hundreds of billions of dollars, and that can’t be too good for the economy either.
You can always find great deals and even one or two situations where you will find the best buy on electronics item at buy.com, but purchasing those products made in China at a good discount is a great deal different than enabling the entire country of China to gamble in the markets and give them their money back even when they lose substantially. I do understand that the people of the United States are not without some blame in this situation, however we do not enter into this situation by ourselves, and the banks and investors including the country of China are partly to blame. So when the United States government representing the people of the United States decides to foot the bill for a mistake made by the country of China, something smells a little fishy to me.
