The media seem to be saying that this is the financial markets' expectation now that Fannie Mae and Freddie Mac might loosen some of their lending restrictions. Fannie and Freddie are implicitly backed up by the government. The business press reported (see the Post for example) that the stock market jumped yesteday on reports that they would loosen restrictions and buy up subprime and jumbo loans that previously would have been excluded from their portfolios. I would question whether even Fannie and Freddie (with our tax dollars) can support the housing bubble in the long-run, although a few trillion dollars can certainly slow the collapse. It can also give the smart money enough time to unload their positions. It would be nice to see a bit of analysis of the implications of the sort of intervention that Fannie and Freddie might undertake. Given that we are having a huge debate on whether we can spend another $10 billion a year to provide health insurance to kids, the public would probably be interested in knowing how many trillions Fannie and Freddie might put at risk in an effort to sustain the housing bubble.
--Dean Baker
