The scenario is still bad, though Fannie and Freddie shares have recovered value over the past few days.
What's wrong with these two going belly up? Foreign (and other) investors would be stiffed. This after Treasury Secretary Paulson stated the government would guarantee Fannie Mae and Freddie Mac.
Foreign investors in particular would think twice about buying U.S. debt - a bad thing when you consider that foreign purchases of our debt have propped up our economy for years.
Here's the Portfolio story:
"The worst is yet to come in the U.S. We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one, one of the big investment banks or big banks."
Those were the words of Kenneth Rogoff, former chief economist of the International Monetary Fund and current economics professor at Harvard, spoken at a conference in Singapore but heard all around the world. More than one year into this credit crisis, Rogoff's comments sparked new fears that the end isn't in sight.
Rogoff believes that Fannie Mae and Freddie Mac, whose shares were pummeled yesterday on fears of a government bailout, should have been closed down a decade ago and will most likely not be around in a few years. "They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds,'' he said.
Not surprisingly, Rogoff believes the U.S. economy is already in a recession. He predicts that housing market will continue to fall and the economic slowdown will last into the second half of 2009.
As if on cue, the Commerce Department reported this morning that the growth of new housing projects fell to its lowest annual rate in 17 years during July.
Rogoff also criticized the Federal Reserve for cutting interest rates as aggressively as it did while the credit crisis unfolded. He believes that will inevitably lead to significant inflation in the U.S. during the next few years.
Also as if on cue, the Labor Department said wholesale inflation rose at the fastest pace since 1981 during July.