Freddie bail-out rally is a dead-cat bounce

The effective nationalisation of Freddie Mac and Fannie Mae at the weekend lit a fire under global equities on Monday. But far from heralding an economic recovery, the support operation merely underlines the severity of the credit crunch.

The effective nationalisation of Freddie Mac and Fannie Mae at the weekend lit a fire under global equities on Monday, with the FTSE 100 gaining 4% and American, German and Japanese stocks gaining 2%-4% as financial stocks led the way. Hopes of a turning point for the global financial system underpinned the rises as they did in January, when the Fed cut rates between meetings; in March, when Bear Stearns was rescued; and in July, when the Treasury was given new powers to bolster Fannie and Freddie. But as Capital Economics says, far from heralding an economic recovery, the support operation "simply underlines the severity of the ongoing credit crunch".

As far as the American housing market is concerned, the bailout should lower the GSEs' (Government Sponsored Enterprises) cost of funding, thus reducing mortgage rates, and cash injections from the state should allow them to expand their lending. However, a major jump in demand for housing looks unlikely. As FT Deutschland points out, the government is not allowing the GSEs to expand their balance sheets much; David Rosenberg of Merrill Lynch notes that consumers are becoming more cautious about big-ticket items, such as houses, and the homeownership rate is already historically high. It's hard to see the GSE reforms alone unleashing "pent-up demand that does not exist to begin with".

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