I’m no financial expert, nor do I profess a deep understanding of the US economy (for example, I’ve only been trained in macro and labor economics theory… a far shot from understanding precisely the relationship between the gold rate, interest rates and stock future prices.)

That is a disclaimer of course. Given my lack of comprehensive knowledge, I would like to offer a superficial response to the government “seizing” the two mortgage guarantee companies Freddie Mac and Fannie Mae. But I think this is fine, because while I have a lot of intelligent associates and friends, I am willing to bet that nobody really knows much about these two companies. So I can feel free to write, and look forward to being corrected if I present an inaccuracy:

It would seem that these companies are sponsored already by the US government. As much as I can tell, the government backs up these private companies’ loans. The company itself goes about buying loans, which allows individual banks to extend credit far beyond their own ability to cover, because they know that these private companies, which are guaranteed by the government, will buy them. In exchange, banks make loans to individuals, using criteria set up by these two agencies (provided as conditions under which these loan buyers will actually purchase the loan.) Supposedly this relieves the burden of backing up the credit from the bank (who immediately turns around and sells the loan, keeping a percentage, and therefore making money), while allowing millions of people who would normally have been turned down by an individual bank to buy homes. The criteria provided by these megalithic companies is much laxer than what would be applied by an individual bank, and can be because the investors in the guarentee agency know that their investments will be covered by the government should some catastrophic downturn in the financial market occur.

Well… it has. Read the rest of this entry »