Is there some reason why reporters are not asking this question? There is a clear rationale for making good on Fannie and Freddie's bonds. If the government allowed these bonds to default, not honoring the implicit guarantee, then investors would recognize that these bonds are far more risky than they had believed. This would raise mortgage interest rates for many years to come. It is understandable that we would not want to see this happen, especially in the middle of the housing meltdown. But what interest does the public have in protecting the share prices of Fannie and Freddie stock? Don't stockholders understand they take a risk when they buy stock? In this case, the stockholders made a bad investment. They are supposed to lose their money (possibly all of it), right? I have yet to hear any explanation from anyone as to why the government is supporting the share price. (In an NPR interview this morning, Senator Chris Dodd gave an incoherent answer that implied that supporting the share price was somehow tied to backing up the bonds. It isn't.) In a country that can't find a few billion dollars to provide funding for child care or children's health care, this multi-billion dollar affirmative action plan for dumb stockholders deserves a little questioning. (NPR's "Power Breakfast" did an unbelievably awful segment in which it commented that some conservatives oppose bailing out shareholders as "socialism." What? Huh? Is this Planet Earth? Socialism is about giving tax dollars to shareholders? In which volume of Das Kapital does this appear? Conservatives may oppose the bailout for whatever reason, but handing tax dollars to shareholders does not correspond to any definition of socialism I've ever seen.)
--Dean Baker
