As the financial crisis continues, the government has stepped in to take over the two largest mortgage finance companies in Washington, Fannie Mae and Freddie Mac. Treasury Secretary Henry Paulson said, "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. A failure would be harmful to economic growth and job creation. That is why we have taken these actions today." He called for Congress to take this opportunity to restructure these companies which, he said, would prevent this from occurring in the future.
These companies buy mortgages and then sell them in pieces to new investors. This creates new money which can then be used to sell more mortgages. Risky lending practices (for example, lending to people who can not repay their loan) over the past few years have made the financial system unstable and many banks and mortgage companies are now unable to sell the mortgages they bought. Fannie and Freddie, thus, became responsible for a majority of the home loans in the nation. Because they, too, are having trouble selling the mortgages they are backing, the government stepped in to make sure that they are able to pay their debts and continue backing new mortgages.
Fannie and Freddie are only viable as long as investors trust in their strength. If investors fear that these companies are not safe investments (that is, if they think they will lose money), they will cease to buy bonds and securities from these companies. This would make Fannie and Freddie unable to pay back the loans they took out to buy the mortgages in the first place. This would trigger a domino effect of bankruptcies in the financial industry. The government takeover is meant to reassure the public that our financial system is under control.
Discussion Question: What are the global implications for a collapse of the American financial system?
- Ms. Hansen
No comments:
Post a Comment