Display mode (Doesn't show in master page preview)

10 Sep 2008

International Economy

Federal Takeover of Fannie and Freddie Lowers Financial Risks (Current Issue No.2097)

KASIKORN RESEARCH CENTER (KResearch) holds the view that the conservatorship of the Fannie Mae and Freddie Mac by the Federal Finance Housing Agency (FHFA) – the regulator of the two government-sponsored enterprises (GSEs) – announced on July 7, 2008, will help restore confidence in the financial sector somewhat. Even so, the government's latest bailout may not suggest that fragility at US financial institutions and the financial turmoil there, especially in their credit market, has come to an end.
In fact, the latest action shows that the government is lending support to their weak US housing market. Unfortunately, the rescue of the two GSEs may ease financial risks to a certain degree given the deepening and lingering problem. Placing Fannie Mae and Freddie Mac into conservatorship may not be a panacea for the US financial and economic crisis.
There are still several factors beyond the control of the US Treasury Department, especially the pre-requisite of dynamism needed in the US economy to ensure a healthy US economic recovery. So far, the US economy has been plagued by rising unemployment, which may eventually have a follow-on effect on consumer purchasing power.

In KResearch's view, it is undecided yet whether all the economic problems faced by the US throughout the past year will be resolved shortly or not. On the plus side, the US Federal Reserve has injected liquidity into the financial system, while also cutting the policy rate and launching rescues for troubled US financial institutions. Still, the US financial sector remains beset with ongoing negative news – e.g., credit constraints, deteriorating book values of assets at US financial institutions – all of which may take some time before the wounds are healed. Even so, the government's bailouts may help ease concern among investors and financial markets worldwide, reviving their confidence that the US government is always there to help withstand a crisis.

View full article

International Economy