'Bold, creative, & aggressive' mortgage action required
Tuesday, 15 Jul 2008 09:27
Fannie Mae and Freddie Mac face hard times
Analysts have responded with dismay to the government intervention in the financial security of American mortgage underwriters Freddie Mae and Fannie Mac.
The two government sponsored enterprises (GSE) – which together underwrite some $5 trillion (£2.5 trillion) of US mortgages – received assurances over the weekend the government would step in to ensure their continued viability.
However, the "fire brigade" move has been scored in some quarters.
"The financial policies and priorities of the Treasury and the Federal Reserve seem to be disjointed and working at cross purposes, leading to systematic underestimation of the threat to the financial system from the current business cycle downturn and the protracted housing recession," argues Brian Bethune, chief US financial economist, Global Insight.
Under the terms of the deal the Treasury plans to infuse unspecified amounts of equity capital Fannie and Freddie.
Furthermore, the board of governor's of the Federal Reserve will now provide unlimited access for Fannie Mae and Freddie Mac to the Fed's discount window as an effective mechanism to deal with the liquidity crisis.
However, the action is likely to prove detrimental to confidence in the longer term.
"The 'fire brigade' approach to dealing with the fallout from the extremely weak domestic economy is eroding general confidence in the U.S. financial system and has led to a pullback in foreign capital investment, just at a time when these critical inflows are needed to shore up severely depleted capital positions," continued Mr Bethune.
In response Global Insight is calling on the American government to action an "bold, creative, aggressive" policy in order to ensure the survival of the organisations in their current capacity as private entities.
"This is not the time for policy makers to underestimate, once again, the systemic risks to the financial system and the huge collateral damage this would impose on the economy," concluded Mr Bethune.
Chris O'Toole