Please, the GSEs and their MBSs are chump change. The International Swaps and Derivatives Association estimates that total value of financial derivatives, of which MBSs are only a small part, is… $531.2 TRILLION as of the end of 2008.

That’s might be true (estimates of derivative worth is tricky) but right now in America the major problem is the residential MBSs. The failure of our major financial institutions is directly linked to the percentage of MBSs in their assets. Institutions that bought up a lot of the GSEs on the assumption they were safe investments got caught. The MBSs definitely triggered the avalanche.

My major point was to show how government action had created the central problem by trying to get something for nothing by using the good faith and credit of the federal government to sell a security that that the free market would consider to risky.

Q: What do Barney Frank and Costa Rica have in common?
A: They both have a collapsed colon.

The GSE’s used to be in a position where they at least tried to make a profit and protect themselves from inordinate risk when they were semi-public companies. Most of the time they really didn’t do much to facilitate “affordable” housing, they just used their implied government guarantee to make money on the spread as they securitized these instruments.

Now they are flat-out arms of the government and executing government policy even to their significant detriment. This will make a bad situation worse.