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The Big Bailout – The Good, The Bad, and The Ugly

The federal government has now intervened to provide support for the economy and restore investor confidence by potentially risking hundreds of billions of taxpayer dollars. While allocating taxpayer money to support illiquid mortgage assets of questionable value is hardly ideal, it will likely prevent the failure of a major facet of the U.S. financial system.

The good news is that action by the Fed, the Treasury Department, and in coming days, Congress, should provide short-term stability in the face of what had been a rapidly accelerating financial crisis that was having impact around the globe.

The bad news is that these actions will obligate U.S. taxpayers to as much as $1 trillion dollars in future cost. Additionally, the situation is not likely to right itself in rapid fashion as the many years of loose lending cannot be repaired overnight.

The ugly is that the federal government providing the “solution” is the same entity that has been asleep at the wheel while the massive government sponsored enterprises of Fannie Mae and Freddie Mac recklessly expanded their lending practices to the point of eventual failure. To make matters worse, they had plenty of private investment banks and lending institutions come along for the ride. Such a failure, the American people were assured, would never happen to Fannie and Freddie, yet somehow here we sit today. And as a result of all the bailout activity, the federal government will be the primary backer for the lion’s share of residential mortgages for the foreseeable future.

Data released in the past week continued to show weakness in the housing market and the economy. Both housing starts and building permits continued to pull-back as negative sentiment and increasing foreclosures hurt sales of new homes. Leading economic indicators were also lower, indicating that a more sluggish economy can be expected in the coming months. The economy has already recorded job losses for every month so far this year while the nation’s unemployment rate jumped to a five-year high of 6.1% in August. Weaker economic growth and the effects from developments in the financial markets this past week are only going to put additional pressure on the employment picture in the months to come.

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