The major problem with housing lately is that mortgage rates are moving up even as US Treasury rates move lower. All of the attempts to fix the mortgage market so far revolve around attempts to get mortgage rates down and thus increase affordability.

This move will unclog tens of billions of mortgage backed securities guaranteed by Fannie and Freddie.  Mortgage rates will fall sharply next week.  Banks will be able to lend again because investors will buy mortgage backed securities which when issued by Fannie and Freddie will now be guaranteed by the US Treasury.

Yes this is inflationary as the fact that the Treasury has a printing press which prints dollars is the reason they can guarantee hundreds of billions in new debt.  But the alternative was a massive deflation whose consequences are far worse.

Bank and financial stocks will rally huge on Monday providing relief on Wall Street.  The Dow shoul d be up several hundred points even as Fannie and Freddie shares go to zero.

This "fix" has been inevitable for over one year.  It would have been a lot cheaper one year ago if the Treasury had just sated back then that it would stand behind the implicit guarantee of Fannie and Freddie debt.  The Administration was determined to let market forces fix the problem.  The problem is way too big for the markets so now a total bailout is required and much more expensive for taxpayers.

But don't fool yourself.  This is good news for the economy.  It doesn't cover up the failures of the Administration which McCain also supported but Obama would have done the exact same thing almost as soon as he took office.

The risk of systemic failure of the financial system had risen significantly again in the past two weeks.  That is a bad thing.  Cyclical risks remain high but that is something that can be dealt with.  No one wants systemic failure.