(2008-07-14) Government Big Lender

The desperate worry over the health of huge financial institutions with country cousin names - FannieMae and FreddieMac - reflects a reality that has reshaped major spheres of American life: the government has in recent months taken on an increasingly dominant role in assuring that Americans can buy a home or attend college... Much of the private money that once surged into the mortgage industry has fled in a panicked horde, leaving most of the responsibility for financing American homes to the government-sponsored Fannie and Freddie... But there is a parallel narrative, the story that critics and competitors of Fannie and Freddie have told for years: how the two companies exploited their pedigree as entities backed by the government to secure an unfair advantage over the private sector. They swelled into highly leveraged behemoths, it was said, on the implicit guarantee that the government would step in and rescue them (Bail-Out) if they ever got into trouble.

• Brad Setzer notes that China holds a huge pile of the debt in those agencies.

Hmm, both those agencies are just in the Mortgage Debt business. Which player in the Student Loan business are they talking about? I guess it's this whole list of players in the FFEL program.

Jul20 update: Peter Goodman on the Free Market irony. For one thing, this argument goes, taxpayers - who now confront plunging house prices, a drop on Wall Street and soaring costs for food and fuel - will ultimately pay the costs. To finance a Bail-Out, the government can either pull more money from citizens directly, or the Fed can print more money - a step that encourages further inflation... Still, as Mr. Tilton and others are aware, one fundamental reality continues to offer assurances that foreigners will still buy American debt: In the global economy of the moment, the United States itself is too big to fail... And this same interconnectedness appears to have reassured regulators in Washington about the health of the American financial system, as they declined to intervene against highly speculative lending during the real estate boom. Mortgages were being distributed to investors around the globe, and so were the risks, the regulators reasoned. Anyone who bought into that risk would have a strong interest in seeing that the American financial system stayed upright. That's a big case of Moral Hazard.