"S&P slashes Fannie, Freddie preferred stock to junk"

The above is a Reuters headline about the Treasury Dept bailout of Freddie Mac and Fannie Mae, but it reads better as a crime blotter headline. Picture the dysfuctional Standard Home Loan family finally imploding as newly minted gang-member "S&P" attacks his sister Fannie with a blade and brother Freddie blots out the world shooting up junk bonds in the corner.

Now I'm not very good with economics, but as I understand this situation, it's mostly a Band-Aid for a gunshot wound. Economists argue the mathematics of the Treasury's capital infusion and debate the efficacy of preffered stock to common stock, but the larger issue is the continuing exposure of the US economic system as a house of cards. Fannie and Freddie are, as Government Supported Enterprises, inherently risky propositions, operating within a tricky netherworld between the private and public sectors. And they also happen to support the entirety of the US housing market. It's too often overlooked, in accounts that I read, that this impacts the ability of citizens to own a home - that's a home, a place to rest your head, give you shelter from the storm, the bedrock of civilized society. Also overlooked is the fact that most Americans can't afford to buy a home. The elimination of Freddie/Fannie stock dividends affects rich people and only rich people, but to read the newspapers, this is the most important aspect of the current crisis, not the fact that more and more people are losing their homes and many others are unable to buy homes at all.

It is stated quite clearly in the Fannie/Freddie charters that their investments are not explicitly backed by the Treasury, but decades of promises to foreign lenders by institutions both public and private have forced the Treasury's hand into a de facto backing of these loans. The situation today is the result of many years of foolish behavior that made the current bailout "inevitable", because it certainly isn't feasible to default on millions of dollars to foreign interests. But how long can the high-wire act continue? Shuffling debts from place to place does nothing to enact a long-term solution.

But long-term solutions are politically difficult, as they would require a serious rethinking and painful reconfiguration of the American system of corporate socialism. Most people seem content to shut their eyes and hope the problem disappears. It most certainly will not. It doesn't take an Economics PhD to see that.

I expect the bailout will result in some short-term benefit, followed by the predictable rosy-viewed editorializing, all of which will be poltically expedient to someone. But the true effects won't be apparent for some time, and their likely to get worse and worse the longer an actual solution is avoided. Which could leave the next President in an impossible position as the caretaker of the worst economic collapse since the Depression.