The Bailout

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THE BAILOUT….So what would have happened if we’d just let Fannie Mae and Freddie Mac fail? I mean, we’ve got to draw the line somewhere, right? Tyler Cowen provides the nightmare scenario:

But let’s say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

Well, um, OK then. I guess rescuing them was the right thing to do. I’m still a little taken aback by the apparent fact that American banks are now almost flatly unwilling to make mortgage loans unless they’re backed by Fannie or Freddie, but that seems to be the case whether it takes me aback or not. So rescue them we must. I suppose my next question is whether it’s worth thinking about how to restructure the American home mortgage industry so that it can operate efficiently even in the absence of massive levels of government backup. Or is Fannie/Freddie style backup just the way the world works these days and there’s no point fussing over it?

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We didn't know what to expect when we told you we needed to raise $400,000 before our fiscal year closed on June 30, and we're thrilled to report that our incredible community of readers contributed some $415,000 to help us keep charging as hard as we can during this crazy year.

You just sent an incredible message: that quality journalism doesn't have to answer to advertisers, billionaires, or hedge funds; that newsrooms can eke out an existence thanks primarily to the generosity of its readers. That's so powerful. Especially during what's been called a "media extinction event" when those looking to make a profit from the news pull back, the Mother Jones community steps in.

The months and years ahead won't be easy. Far from it. But there's no one we'd rather face the big challenges with than you, our committed and passionate readers, and our team of fearless reporters who show up every day.

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