So the government takes over Freddie/Fannie

(and China dropped about 25% of its holdings of them about a week ago, which I find interesting timing and probably was the clincher), WAMU is circling the drain, Lehman Brothers is right behind them, both of whom are possibly considered too big to fail. I know there are others in line behind them. So how is the big picture going to play out. Fannie and Freddie had $5 trillion of debt. Yowza. I think that's what I heard on NPR today. So give me your predictions on how this will all play out in the coming year or two. How will our lives be different?

Real estate will hit rock bottom, everyone gets hit, China and India have to figure out how to feed their people and get foreign oil without selling every bit of shoddy manufactured goods to the US and Canada and Europe, and we all adjust our view of the world as able to supply every want.

We are bailing out Freddie/Fannie in part because our consumer economy (Wal-Mart) and financial markets (i.e. borrowing) are heavily tied to China.

The U.S. has to take over Fannie Mae and Freddie Mac to prevent foreign investors from taking it to the woodshed.

China exports billions of products to the U.S.
To purchase those products, the U.S. has to buy Yuan and sell Dollars.
A higher demand for Yuan would increase their value and make it difficult for China to keep their goods cheap.
Therefore, they take the U.S. dollars.

With so many dollars in hands, China is able to invest tons of cash in the U.S. economy notably Housing.
As more banks get Chinese Capital, they start lending money loosely and U.S. real estate property values soar...

The Housing Bubble has now burst and many of the mortgages Fannie and Freddie supported are worthless.
To prevent foreign investors from taking all their capital back, the U.S. government has to bail Fannie and Freddie.

...of the late 13th and 14th century Europe but on a world-wide scale here in the 21st century

And what else are you doing differently? I'm not in survivalist mode yet but trying to stay in decent financial health.

It'll be pretty ugly but survivable if Obama wins and we have veto-proof majorities in both houses.

It'll be very ugly but survivable if Obama wins and we DON'T have veto-proof majorities in both houses.

If Obama loses - best to move. The US will become a very scary place. Fascism will become ascendant, there will be hunger and riots.

I will always love my country even if I hate my government.

But this Freddie/Fannie thing is a good lesson for those who are inclined to agree with neocons that private sector people should have control of things backed by taxpayers.

Would you still love your country? I doubt it.

A line is crossed at a certain point. And, as a Jew, I have ample examples in my family tree of what can happen when economies get awful and people get crazy...

Is that affordable housing should not be outsourced to the private sector. Well, plus the fact that the financial sector should, on no account, be allowed to police themselves.

Rather, they served to increase housing prices by making money easier to borrow (that supply/demand stuff).

That would have been the case had supply remained constant.

What they did was ensure a steady increase in supply to meet the demand until the market went a little nutso after the artificially high interest rates of the 80s eased up and demand did outstrip supply.

They're in trouble now because supply far exceeds demand. Too much of the wrong type of housing was built for people who had no way to afford it but who wanted display houses. The industry also built to supply normal demand plus speculative demand. We have the classic deflationary model with a glut of supply and a dearth of demand.

Blaming Fannie Mae and Freddie Mac for the current housing crisis is like blaming the WTC for 9/11.

or at least they're responsible for the blunder of buying up a bunch of junk loans from other companies that blundered by lowering their lending standards.

by buying up questionable loans from outfits like Countrywide. Don't forget, though, that Countrywide had to set up Indy Mac to launder the big junk loans.

They're also responsible for that culture of corporate corruption that allowed greedy and bungling upper management to waltz off will millions in bonuses even as the corporations were failing.

Both these need to be corrected with this bailout. Whether or not they will be is anyone's guess. My own feeling is that they never should have been privatized in the first place and should have remained under the eagle eye of the General Accounting Office.

It's so depressing that almost no one in the MSM or in the general public seems to understand this finaicial crisis.

Fannie and Freddie were not responsible for bad lending practices. In fact, by establishing lending standards, Fannie was responsible for creating the very standard of "prime."

Another false meme that makes my teeth grind is the idea that financial institutions were buying "risky loans" or "risky securitized loans."

If this panic was about risky loans or securities, it would be confined to investors who specialize in taking risks.

The reason the panic is so widespread is that mortgage backed securities were considered to be CASH EQUIVALENTS. They were considered to be ultra safe. The were priced in terms of "spread over treasuries," which meant that they were priced in terms of their very narrow, slight interest rate advantage over treasury bills, the safest investment in the world over dollars themselves. Mortage backed securities, including the ones Fannie and Freddie bought was where institutions parked their money that they weren't using.

That's why the crisis is so widespread.

The intentionally risky stupid stuff Fannie and Freddie did was interest rate arbitrage, which turned them into gigantic hedge funds.

Although the Chinese are very successful, you'd be surprised that they are not that sophisticated economically. They basically fixated on a simple strategy of what to do with their surpluses that worked via inertia, but wasn't in their best interests.

China will slowly convert its surpluses into investments and improved standard of living in China. The Chinese public is pissed off that their central bank has been lending the US cheap money so we can make war and buy their cheap manufactured goods. One Chinese blogger wrote it's as though we made them a gift of 200 aircraft carriers while there are still hundreds of millions of poor people still in China. Expect them to move out of US treasuries and mbs and into a New Deal type improvement in living standards. To use a Star Trek analogy, they have been catching up and surpassing us on impulse power; after they start a program of internal consumption improvements expect them to pass us as warp speed.

Our only hope is a drastic (30%? 60%?) decrease in defense spending. Expect this to be imposed from outside creditors, because the US electorate is too stupid, chauvinistic, militaristic and economically illiterate to understand that we simply can't afford to spend more than the rest of the world combined.

Obama will be accused of surrender to the IMF, China, Japan and the E.U. creditors. But fuck it, progressive taxation and reduced military spending will be irrevocably in place as a "structural adjustment" package no matter what knuckle dragging republican might be elected as a backlash.