Freddie Mac and Fannie Mae stocks took a dive yesterday. Both are now down 60% from the beginning of this year. These are congressional chartered companies that buy up mortgage loans and finance these through issuing bonds. These bonds have the implicit backing of the United States but it is unclear if this would hold when they default.

Many of the mortgages Freddie and Fanny bought over the last years are of dubious value and it is likely that the companies will lose a lot of money. Both will need fresh capital but I find it hard to see how anyone sane would invest in these. The U.S. taxpayer will have to jump in.

The last days made it clear to anyone that there will be no recovery this year and likely not even next year. The housing market will correct further down and take the country deeper into recession and possibly into a depression.

The whole problem is the result of false economic policies that started with Reagonomics and continued through Democratic and Republican presidencies.

Where is the political answer to this?

Schumer’s housing bill will rescue some of the banks that finance his campaigns but it also puts even more burden on Freddie and Fanny. The rebate checks were used at the gas stations and did not ignite more economic activity. There were already calls for a second round of such checks.

Instead of financing further consumption any future program should put money were it really could induce more economic activities: creating new infrastructure especially for public transit, repairing bridges, changing suburbs into something that resembles towns and the like.

The program will have to be big. It will be a difficult fight to finance it as tax revenues will tank and liabilities  increase further through the wars that will continue to go on.

As the situation will get much worse over the next months, both presidential campaigns will have to present some new programs. McCain’s current economic program of lowering taxes for the rich and corporations while claiming to balance the budget is just laughable. Obama’s current program is much too small and consumption orientated.

The U.S. has structural problems that need structural answers, not some simple tweaking of economic screws here and there.

This chart (stolen from Krugman) shows the share of the richest 10 percent of the American population in total income. We are back in the gilded age and a new New Deal will be needed.

Could a possibly coming depression trigger the political will to introduce one?