Let Fannie and Freddie Fail?

Not everybody thinks the government needed to step in and essentially take over Fannie Mae and Freddie Mac. Banking guru Martin Weiss thinks the financial situation at the two mortgage giants is far worse than many realize. That, combined with a worsening economy, will doom Uncle Sam's efforts, he says. "Just to keep Fannie and Freddie solvent will take so much capital, there will be no funds available to pursue the primary mission of this bailout—to pump money into the mortgage market and save it from collapse," Weiss says. "That mission will ultimately end in failure."

Weiss, in the analysis I link to above, outlines what he thinks Treasury Secretary Henry Paulson should be saying to Bush right about now:

Let's say I'm a foreign investor and I own U.S. Treasury bonds. This implies that I trust the U.S. government; that I loaned you my money for the purpose of running your government. Now you take my money and pass it on to a third party, a private company. So I say to you, "What did you go and do that for? If I wanted to loan the money to that company, I would have done so myself—directly—in the first place. But I didn't. I didn't do it because I don't trust the company. I trusted you. But now I can't trust you anymore either. Now you're just one of them." So the investor stops buying our bonds or, worse, dumps the government bonds he's holding, and then we are in trouble. Then we can't sell our government bonds anymore to pay off the old ones coming due. Then we, the United States government, default.

Another antibailout guy is George Mason University economist Bryan Caplan. At the EconLog blog, he writes:

My own view: As usual, Herbert Spencer got it right: "The ultimate result of shielding men from the effects of folly, is to fill the world with fools." The U.S. has just missed a golden opportunity to credibly signal to the world for decades to come that "no guarantee" means "no guarantee." I've previously argued that economists underrate the death penalty because they aren't factoring in availability bias. I think they're underrating a "Just say no to bail-outs" policy for the same reason.