Bail Out: Fannie/Freddie or McCain?

S&P responded very well on Monday to the bailout news of Fannie Mae and Freddie Mac.  We should also expect more news generated from Bush administration to lift the economy when we move toward November.  Actions taken will be timed to trickle into the economy by late October.  We are now 54 days to November.  If this bailout were aimed to ease the credit market, then this bailout maybe a little late to help McCain.  It may work to lift a little more support, if McCain is lucky.  

 

This response also coincides with the surge of McCain in polls.  Yes, they are clearly unrelated, they got their own different causes as well.  This surge is more related to Palin, of course.  Polls don’t mean much. It is the electoral votes that matter.  if we look at the electoral votes, then we see that Obama has lost 11 electoral since 08.29 (Obama: 228; Mc Palin 185; Toss Up 125).  Obama now has 217 (Mc Palin 189, Toss Up 132).  If there is no toss up, both sides stay the same.  McCain Palin has not earned much but destabilized Obama’s electoral votes.  However, it does seem like Palin has made firm gain. 

 

This bailout is not the kind of solution Paulson has vowed to implement.  Bailout is a patch, not even a fix.  Yes, this is costly, costly enough that it now became an item into next year’s budget.  What is the next step for the federal government?  Is there an exit strategy for this bailout?  Federal government ought not to own these enterprises, although they are Government Sponsored Enterprises.  With such a huge price tag, how can the federal government unload them?  What kind of effect will it then be when the government unloads?

 

The kind of solution Paulson wanted probably meant to make both Fannie Mae and Freddie Mac to have smaller market share so that there will be more competitors in that segment.  However, bailing them out means that option is shut for another one or two presidential administrations.  Subsidizing for political purpose does not mean it is economic for the whole society.  However, bailing them out may mean suffocating all competition in that market.  Fannie Mae and Freddie Mac are now nationalized.  If they continue to monopolize that portion of mortgage market, it may become more and more difficult for the small retail banks to keep their residential mortgage portfolio healthy.  That is another risk Paulson has chosen to take.  So, is this bail out for the health of economy or for presidential election?