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How will the taxpayers pay if Fannie and Freddie Mac fail?

Name: Gerald Gooding
City & State: Huntington Beach, Calif.

Question/Comment: Fannie Mae and Freddie Mac, we are told, are so big, we can't allow them to fail. We taxpayers could end up footing the bill for as much as $200 billion. Where will that money come from? How will we taxpayers pay? Will Congress cut existing programs or levy a special tax to pay for it? Or will the Treasury simply print more money?

Paul Solman: We wind up footing the bill if Fannie and Freddie lose money; i.e., if so many of the loans they've made and/or guaranteed go bad that they lose more money than they currently have "in the bank"; lose more than their capital, that is.

That might not happen, of course, if the housing market were to turn around. The government could even MAKE money if most mortgagees keep making their payments, the profits from which might then end up in federal coffers.

But if F&F do suffer losses, we taxpayers would foot the bill the way we foot all bills these days: by borrowing more to cover the greater deficit that such losses would represent. Congress COULD cut expenses to the extent of the losses. But aside from the famous "government waste" I've heard about all my reportorial life, but which almost always turns out to be an untouchable favorite program of someone else, what exactly are we likely to cut?

One more point. The government doesn't actually "print" money to cover its deficits. It creates it. One way is by borrowing and in return, issuing more IOUs - "Treasuries" known as T-Notes, T-bills, and Treasury bonds. They aren't even printed on paper anymore. They're just digital entries on computers.

But when they come due, the government will redeem them by sending you a check, which you can cash for currency.

The problem is that the more dollars there are out there, all else equal, the less they're worth. That's inflation, which lowers the value of the U.S. currency. Aunt Sam(antha) pays back her creditors in devalued dollars. But those of us with dollars can buy less, and are thus poorer than we were before.

-- Posted September 11, 2008 | Comments (0) | Permalink