Rescue Plan for Fannie Mae

Is the proposed rescue plan for Fannie Mae and Freddie Mae going to work? The coming days will tell how good rescue plan was and if Mr. Paulson understood the whole problem.

Treasury, Government and Fed. continue to sweat on rescue plan for Fannie Mae and Freddie Mac. Treasury secretary Hank Paulson annouced three part plan - (http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&story_id=11735141)

1) Increase line of credit to the government-sponsored entities (GSEs), which currently
stands at a paltry $2.25 billion each.
2) Seeks authority to buy stakes in each company if necessary, and
3) Give the Federal Reserve a greater role in oversight of the GSEs.

Hank Paulson’s announcement of rescue plan, just before Asian financial markets opened, gave some support to the dollar. Japanese investors own $229b of debt issued by Fannie, Freddie and other U.S. – government related entities. China owns $376b of such debt. Total of $1.3 trillion is owned by different countries. Though it is not clear how much of this is from Fannie and Freddie, still this is a huge debt own by other countries. As Mr. Paulson made clear, part of the problem with the two institutions is that their debt is held by investors around the world. That includes many central banks. The fear is that a sudden collapse of either institution might pose a threat to the dollar and the global economy.

The downside risks to growth remain a big challenge to Bernanke. As he mentioned today, the economy is facing “numerous difficulties”. He outlined a long list of downside economy risks which includes ongoing financial stress, falling home prices, a weaker job market and rising food and energy prices. It is clear now, or atleast for now, that the interest rate is not going to change before the end of this year.

Looks like the whole recovery process is going to be very slow and it may take years before we are again in growth mode :-(