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Reality reasserts itself after Fannie & Freddie stunt

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To the surprise of nobody with more than a couple of economics brain cells to rub together, the bail-out / conservatorship / nationalisation by any other name of the US GSEs Fannie Mae and Freddie Mac offered only a temporary reprieve to the markets. Temporary, in this instance, meaning less than 48 hours.

The initial misplaced euphoria from unthinking investors (and I’m deliberately excluding those canny enough to ride the index spike up and short it back down again) quickly gave way to the realisation that this act – though probably unavoidable in the grand scheme of the current crisis – does not represent the beginnings of a return to a stable world financial system.

On the contrary: it highlights the mess we’re in.

Think about it. The two entities that between them guarantee the mortgages of 50% of the US housing market are now effectively being supported and funded by US tax-payers. Makes perfect sense to me: I think I’ll lend myself £500k to buy a house.

As Lehman Brothers shows – and others aren’t far behind – the excrement is still firmly caked onto the fan. Until the entire leveraged finance debacle unwinds there’ll be a lot more pain for all concerned as the mass delusions of the past decade disappear in a puff of bad debt.

Luckily the BBC perfectly understands the mood of its people, ignoring rational analysis in favour of crowing that the US bail-out would somehow help the UK housing market.

It’s embarrassing that the state-funded broadcaster believes that the entire UK economy is based upon ever-increasing house prices with correspondingly astronomical levels of debt.

It’s even more embarrassing that the BBC is probably right.

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