Economics in Us

Economic Crisis in Our Backyard


      Mark Davis

      All around us is evidence of economic heartache, as I sit and write this paper I hear the fear in the people on the television. Christmas is near and times are tougher now than anyone remembers, lay-offs, stock market crashing, bailouts and so much more have infected our lives. We are suffering from a near depression, if we can’t consider ourselves in a depression. Our economic status is shaky at best, with no end in sight. And the government solution “bailout”.
      To understand the current economic turbulence in the United States, it is necessary to study the two credit institutions which played a decisive role in its creation: Fannie Mae and Freddie Mac. The business of Fannie Mae consists of underwriting loans granted by other credit agencies. The Federal Home Loan Mortgage Corporation, Freddie Mac for short, was created in 1970 with the same basic structure and purpose as Fannie Mae. The two institutions were taken over by the federal authorities on 7 September 2008, as both of them were very badly hit by the crisis to which they had largely contributed.
      It should be mentioned that these institutions in the preceding months had been in charge of 70% of the mortgages in the United States, which provides an indication of their decisive role in the market where the crisis first occurred. Prior to being taken over by the federal government, these institutions had a very peculiar design. Fannie Mae and Freddie Mac were on one hand government entities with political goals for which they received substantial subsidies; on the other hand, they were private businesses seeking to maximize shareholder value. At the same time, the Federal Reserve has for a long time kept a very low federal funds rate.
In 2003, the interest rate for 3 month treasury bills were as low as 1%.   Above all, from 2003 to 2005 the Federal Government maintained the interest rates below the expected inflation rate...