Hank Paulson Got It Right on Fannie and Freddie

On Friday as I saw the 6.1% unemployment data released, I began writing a blog. Even though GDP was revised up, the meat and potato issues of lost jobs and homes were sure to cause the media to go on a "sky is falling, duck and cover" campaign that would leave most Americans wondering how we were ever going to get beyond this housing debacle, and in the process, freeze spending and weaken the economy in an even broader way. So I wrote that government must do more; that government must do what it could to stabilize all mortgage markets. To accomplish this, they must become direct participants in buying mortgages to push mortgage rates down, which would stimulate demand for housing and refinancing opportunities for those that qualified. Please read my Friday blog. It was not broadcast because I did not finish it until after 5:00 PM CDT. Late in the day, the Wall Street Journal carried a story that Hank Paulson, Treasury Secretary, was readying a takeover of Fannie Mae and Freddie Mac. In essence the US government was getting into the mortgage business. Hallelujah. This is something that I have been calling for since March, and this was the direct approach that I was advocating in the Friday blog and in previous ones. I repeat that I am a free market advocate to my bones, but the housing bubble threatens to set our economy on a decade-long bubble unwinding, which would produce sub par growth and economic malaise. The housing debacle has become a threat to our national security and that is a job for government to solve. Our friends on Wall Street and in the banking business have finally bitten off enough risk that they had choked the whole economy. The actions of Secretary Paulson will be debated and second-guessed, but I am convinced that they were necessary and that they will soon begin to bear fruit. Here's why. The weak link in the US economy is housing. If a floor is put under the housing market, the rest of the economy is still humming along reasonably well and will continue to do so. Oil prices and commodity prices are falling, which will have a positive psychological and economic effect on Americans consumption. High oil and commodity prices have not been overly worrisome to me from an inflationary standpoint because they have acted more like a tax on consumption. If these prices continue to fall, or even stay near current levels, inflationary pressure will diminish dramatically, and consumers can breathe a little easier and plan a little more long range. I believe Secretary Paulson's actions will be seen by worldwide investors as necessary and responsible and will cause money to begin flowing back into the US from foreign investors. The actions were bold, they were decisive, and even though I wish they would have happened a month ago, they will be rewarded with positive reactions in the US stock market. The government has more work to do to unfreeze the economy, but today's actions with Fannie Mae and Freddie Mac are a powerful message that Paulson and Bernanke are on the same page and will use every tool they have to produce an under girding to our economy. I also like the fact that the takeover of Fannie and Freddie has sunset provisions that will require the next administration and congress to act, or these changes will be gradually unwound.