Why did the Bush Administration bail out Fannie Mae and Freddie Mac?

September 8, 4:15 PMProgressive Politics ExaminerJay McDonough

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Following this weekends news the Federal Government was stepping in to nationalize embattled mortgage agencies, Fannie Mae and Freddie Mac, it begs the question: why would the free market advocating Bush Administration make the decision to bail out the two corporations. 

Tyler Cowen took a stab at esimating the fallout had the Feds not stepped in:

But let's say that the Treasury did not support the debt of the mortgage agencies. The Chinese bought over $300 billion of that stuff and they were told that it is essentially riskless. The flow of capital from them and from other central banks, sovereign wealth funds, and plain old ordinary investors would shut down very quickly. The dollar would fall say 30-40 percent in a week, there would be payments system gridlock, margin calls at the clearinghouses would go unmet, and only a trading shutdown would stop the Dow from shedding half its value. Most of the U.S. banking system would be insolvent. Emergency Fed/Treasury action would recapitalize the FDIC but we would lose an independent central bank and setting the money supply would be a crapshoot. The rate of unemployment would climb into double digits and stay there. Many Americans would not have access to their savings. The future supply of foreign investment would be noticeably lower. The Federal government would lose its AAA rating and we would pay much more in borrowing costs. The deficit would skyrocket.

Gulp.  Sounds like a good decision, doesn't it?