Uncharted Territory

July 23, 2008

Fannie and Freddie Get Naked: Update

Filed under: Economics, Housing market — Tim Joslin @ 3:16 pm

It’s important to be accurate so here are a couple of corrections to my previous post:

First, I now see from the Battlestar Galactica subtitles that the past participle of “frak” is “fracked”, not “frakked” as I said last time. Future students of early 21st century English are going to be extremely puzzled not just by the irregular conjugation of the verb (cf. whack, whacked), but also by its usage. Rather than a euphemism, it is apparently a direct substitute in all circumstances for the overused vernacular term for what a naked Fannie and Freddie might indeed get up to. It’s bizarre when you think about it that the rules for pre-watershed TV are so strict when no such restrictions apply to the stack of DVDs families might choose to watch instead. At least Red Dwarf’s “smeg” had its own independent usage, and in many cases must have been more vulgar than the word it replaced!

Second, I see an informative article in the NYT today about Fannie and Freddie provides a “multimedia” graph comparing “jumbo” and F&F compliant mortgage rates since 2001. It’s only since the start of the credit crisis that the spread has been as much as the 1% I mentioned: previously it’s been around 0.2%. Nevertheless, a very generous subsidy that only served to inflate the housing bubble. Of course, it’s not really the amount of the subsidy which inflated the housing market – this just reflects the risk the taxpayer has taken on. The fact that F&F’s debt was sold like US Treasuries paying a generous rate and $100 billions are owned by safety-first investors such as China and other states allowed more money to flow into the US housing market than would otherwise have been the case.

Some interesting comments on the effect of F&F on the US housing market are collected here.

It doesn’t look pretty.

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