US taxpayers are about to find out what their long-standing and (strictly speaking) non-existent guarantee of Fannie Mae and Freddie Mac will cost them. One way to think of it is this: take the US national debt of roughly $9,000bn and add $5,000bn. Not bad for an obligation still officially denied.
In the end, that astounding prospect might be the outcome. Partial or outright nationalisation of the housing lenders – colossal pseudo-private entities that own and underwrite US housing loans – would add some or all of their $5,000bn (€3,144bn, £2,513bn) in liabilities to the government’s balance sheet. While it is true that the agencies (unlike the government) own housing-related assets that roughly match those liabilities, the still-collapsing housing market makes this a lot less reassuring than one could wish.
Covering the agencies’ losses on their loans and guarantees is going to require an actual outlay, which will fall on taxpayers. You could plausibly call the rest – namely, bringing these “government-sponsored enterprises” explicitly inside the public sector – just a bookkeeping entry. But what an entry! It would surely shake financial markets, raise the government’s cost of funding and put heavy downward pressure on the dollar.
I get it until the last part of that last sentence. As a general rule we expect markets to process all available information (yes, I know, more in the breach etc) and to react only to new such.
As that $ 5 trillion has always been implicitly guaranteed by the US Treasury (yes, implicitly, not explicitly) is there in fact anything very much that is changing here? Is it in fact just a book keeping exercise that doesn\’t change the real debt position at all? And if it is that, why should either Treasury borrowing costs rise or the dollar tank (further)?