Government bailout brings its own risks

It was risk that got us into the mortgage crisis.

And it is risk that characterizes Washington’s bailout of the Fannie Mae and Freddie Mac mortgage companies.

Federal officials said they would seize the companies and place them in a temporary conservatorship. That gives the federal government — and the taxpayers — a financial stake in the companies.
The move was made because failure of one or both would have had a devastating ripple effect on the U.S. economy. The companies together own or guarantee about $5 trillion in mortgages. The en-tire federal debt is “only” $10 trillion.

Those figures show two sides of risk.

Five trillion dollars in mortgages is a huge share of the market. The housing market and the overall economy, so closely tied to housing stability, already are tottering. A meltdown by Fannie Mae or Freddie Mac might have pushed the economy over the edge into a full-fledged recession, if not a depression.
But the long-term risks are less predictable and potentially just as frightening. What will it mean for the economy for the U.S. government to increase its debt by perhaps another 50 percent? How will the government pay its debts — including those private housing debts it has now agreed to guarantee? If those bills come due, can the U.S. Treasury handle them? If it can’t handle the strain, then either inflation or recession would be the likely result — putting us right in the kind of economic crisis the takeovers were designed to prevent.

The government is gambling that these bills won’t come due, not most of them anyway. By taking over the companies and guaranteeing their mortgage holdings, Washington is putting its reputation and our taxpayer assets on the line to say: Failure is not an option. Financial markets, mortgage holders, homeowners and others can breathe a sigh of relief and back away from triggering an economic panic.

The long-term risk is less predicable. If the gamble doesn’t work, doesn’t stave off meltdown, then U.S. taxpayers will be left holding the bag.
There’s another risk that has been raised by analysts. If government repeatedly comes along and bails out failing companies (Washington already ar-ranged the bailout of investment firm Bear Stearns earlier this year), then companies have even less reason to exercise fiscal rectitude in the future. They are relieved of accountability.
Freddie Mac and Fannie Mae might have been necessary interventions. But maybe Bear Stearns wasn’t.
Finally, there is this: Washington already has the Federal Housing Admin-istration, which issues or backs housing loans. Now it’s acquired Fannie Mae and Freddie Mac. That gives the federal government a direct interest in about three-quarters of the nation’s mortgage paper. Why should government have this kind of dominance in private business?

The answer, for the short term, is that we’re in an economic emergency. Federal intervention is justified.
The risk for the long term is that intervention will not calm the market and stave off massive foreclosures, and that the U.S. government — that is, taxpayers — will be liable for the damage.

And the risk for the long term is that the U.S. government won’t know how to get its fingers out of the pie now that it’s plunged in arm deep.