$6 Trillion More

The finan­cial mar­kets are going to have quite a ride this week:

The boards of mort­gage finance com­pa­nies Fan­nie Mae and Fred­die Mac were set to meet on Sat­ur­day to dis­cuss a gov­ern­ment plan to place the com­pa­nies under fed­eral con­trol, sources said.

The U.S. Trea­sury Depart­ment plan to put the two gov­ern­ment spon­sored enter­prises, which own or guar­an­tee almost half of the country’s $12 tril­lion in out­stand­ing home mort­gage debt, into fed­eral con­ser­va­tor­ship could amount to the largest finan­cial bailout in the nation’s history.

This means that the United States’ national debt will poten­tially increase by nearly $6 tril­lion in almost a sin­gle moment. The fed­eral gov­ern­ment will per­son­ally cover every bad mort­gage on which Fan­nie Mae and Fred­die Mac can­not receive pay­ment. Of course, the two com­pa­nies are “too big to fail” because they con­trol roughly half of the hous­ing mort­gage mar­ket, but this alter­na­tive is just as bad.

The arti­cle men­tions one obvi­ous result:

The com­pa­nies never lost their access to cap­i­tal mar­kets where they raise money to sup­port the U.S. hous­ing mar­ket, but the biggest buy­ers of the debt have grown more cautious.

 For­eign cen­tral banks reduced their hold­ings of “fed­eral agency” debt in cus­tody at the Fed­eral Reserve in the past week for the sev­enth week in a row, sug­gest­ing a grow­ing aver­sion to the debt.

Why would any­one con­tinue to loan money to a per­son who is increas­ingly unable and unwill­ing to bal­ance his bud­get and reduce his debt? I would not be sur­prised if the dol­lar con­tin­ues its gen­eral decline after this plan is enacted.

Update: It’s offi­cial.