The Sovereign Debt That Dare Not Speak Its Name

Timothy Geithner has apparently penned a letter to Representative Scott Jarrett (R-NJ) telling him that Fannie Mae and Freddie Mac's obligations are not sovereign debt. Of course, the United States government believes that supporting this debt is crucial to saving the economy. But just because we're not-so-implicitly guaranteeing this debt, doesn't mean that you should treat it like government debt.

Geithner . . . said debt from the two government-sponsored enterprises isn't the same as U.S. Treasurys, but that support for the two firms "is crucial in helping to stabilize the housing market and the overall economy. The Treasury's actions regarding the two firms, which have been under government control since September 2008, "should leave no uncertainty about Treasury's commitment to support Fannie Mae and Freddie Mac," Geithner wrote.

This is exactly the sort of nudge-nudge, wink-wink, now-we-guarantee-it-now-we-don't behavior that allowed the companies to get themselves (and by extension us) in so much trouble in the first place. If we want companies that get the attractive low borrowing rates available to the US government, we should make them a government agency and be done with it. If not, we should sell off their assets and dissolve the companies. But "neither fish, nor fowl, nor good red herring" is not a healthy state for a financial firm. Investors are all too willing to give them the rope they need to hang the taxpayer high and dry.