Monday, September 8, 2008

Fannie, Freddie Taken Over

 Orange may be contagious. Today's financial news proves yet again that so is investor confidence.

Following Sunday's announcement by the Feds that the government was taking over Fannie Mae and Freddie Mac stocks rose over 340 points within minutes of the opening bell on Wall Street.

International stocks followed suit. London's FTSE 100 rose 3.8% on the news, while the DJ Euro Stoxx 50 (measuring euro blue chips) lifted by a similar 3.75%.

Fannie and Freddie are the Government Sponsored Entities (GSEs) responsible for over 1/2 of the nation's home mortgages.  The takeover is meant to ensure the flow of credit through the US housing market, which is one of the US economy's largest driving forces. But it seems to be also having the happy effect of calming uncertainties on the international stock and bond scene.

David Wessel of the Wall Street Journal, appearing on the NPR morning show Morning Edition, noted that overseas markets seemed to be showing "a vote of confidence that someone's taking control."

Speaking on Sunday at the press conference announcing the move, Treasury Secretary Henry Paulson said the move to federalize the two mortgage giants was justified. "Well, our objective here is to prevent a serious risk to the financial system which would hurt all taxpayers because our financial system is just critical to our overall economy. Anybody that wants to have a car loan, a mortgage, any kind of credit, needs a strong financial system," said Paulson.

Like it or not (and many vocal critics don't) easy credit greases the wheels of the modern American economy. What happens next is anybody's guess, but for the moment the wheels seem to be back on track.

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