The US will intervene to lend to Fannie May and Freddy Mac - by far the biggest home lenders in the US. They may even buy stock in the firms to support their equity price. Their equity prices have fallen by half in a week.
A joke in Washington these days goes like this: "What's the difference between Enron and Fannie Mae? Answer: The guys at Enron have been convicted."
Paul Krugman sets out the background to the Fannie and Freddie problems. These institutions were not involved in the sub-prime crisis - they have just been caught with substantial lending to housebuyers who paid too much for their houses. Many borrowers have negative equity in their houses so that delinquency rates are high. This poses problems basically because these institutions are undercapitalised and the US government have effectively guaranteed their liabilities.
Krugman argues that it is no big deal that taxpayer money will need to rescue these firms - he argues theUS is in a major financial crisis and this ctype of intervention is inevitable. To Krugman Fannie and Freddie can’t be allowed to fail since with the collapse of subprime lending, they’re now more central than ever to the housing market, and the economy as a whole.
Its true that intervention is desirable from the viewpoint of the global financial system - it would be dealt a hefty blow were these firms to fail. These institutions have over $5.3 trillion in liabilities and the problems they face stem from the moral hazard implications of the US government guaranteeing these liabilities. Its ca repeat of the S&L saga. The difficulty here is that the current bailout provides the grounds for worse problems in the future. It is an apparently tough choice but not really a choice at all given that history cannot be rewritten.