An Article of Faith

I want to believe that the federal takeover of Fannie Mae (FNM) and Freddie Mac (FRE) is a silver bullet unlike the July promise to back them with public funds or the Bear Stearns salvage operation back in March. And it goes without saying that I hope the latest action proves more effective than January's rapid interest-rate cuts, or the ones ordered up last fall, for that matter. Treasury Secretary Hank Paulson once advocated a "super-conduit" fund, the Hope Now mortgage rescue package and the springtime fiscal stimulus as solutions to our economic ills. So I bet he's also hoping that this proves to be stronger medicine.

This is why its was so disappointing to peruse the financial press last night and learn that they have every Wall Street wet blanket on speed dial. Turns out the the Fannie and Freddie rescue will not halt the credit crunch, the financial deleveraging or the housing "correction," as President Bush calls the downward spiral in prices. Turns out that "longer-term we have a lot more glass to crawl over," as one Hong Kong one analyst told Reuters.

The best way to look at the decision to nationalize the mortgage giants is to understand that, rather than making things better, it is designed to stop them from getting worse. The Wall Street Journal's reportage of the runup to the takeover action didn't just tell us which soft drinks the policymakers drank and what they wore to the planning sessions. It also informed us that the Morgan Stanley (MS) bankers working gratis for the government expected Fannie and Freddie to lose as much as $50 billion, much worse than the companies themselves let on. It also makes clear that the Treasury was fielding calls from foreign governments sufficiently worried to consider dumping the debt backed by the Fannie-Freddie Frankenstein.

This apocalypse has now been averted: With mortgage guarantees nationalized, conforming housing debt is now as good as a government bond, with an extra percentage point of yield to remind us of our policy failures. Lower mortgage rates can only help. But they will not shore up the balance sheets of banks or of consumers, nor stop the grinding of economic gears around the globe.

The U.S. housing market is but one symptom of a wider malaise brought on by systemic failures in finance and economic policies. The average U.K. home is still worth $306,000, after the 13% year-over-year decline and despite the British pound's rapid drop of late. Home prices are also dropping in Spain, and in New Zealand. Bankruptcies among property developers are surging in Japan. It's all looking a lot like the U.S. looked a year ago, right down to the banks whistling a happy tune.

Meanwhile, the era of over-consumption in the U.S. and over-production in Asia draws to a close, to be replaced by some more virtuous arrangement that appears not to have been invented yet. Meanwhile, there's Hurricane Ike, aimed at the heart of the Gulf's energy patch. I hope this time it's different, but more of the same seems like a better bet.