"The Foundation of the Housing Market has Begun to Collapse"

Here's a few paragraphs to go with Mike's commentary on the economy, from Numerian at the Agonist:

There are two really devastating events, outside of another foolhardy war, that could push the U.S. economy into a depression. The first is a dramatic increase in defaults on consumer credit card, auto, and home equity loans from prime customers, and the second is a collapse of the government sponsored enterprises that support the housing market. This week the first suggestions have begun to appear in the market that both Fannie Mae and Freddie Mac are insolvent. Since at least 2005 a number of commentators here at the Agonist have been mentioning this possibility as an important step in the collapse of the economy as the debt bubble is deflated. Back then, very few economic observers were willing to suggest such a thing, but one of them was Fed Governor William Poole. He laid out the egregious decline in credit standards that was feeding the housing bubble, and he laid blame in part on Fannie Mae and Freddie Mac. This week he stated the obvious: from an accounting standpoint, Freddie Mac is now insolvent, and Fannie Mae will be so by the end of next quarter. This means if you put a price on all their assets, there is not enough cash left over after liquidation to pay off all their liabilities. These are no longer going concerns. The stock prices of both companies tanked. Fannie Mae, the bigger of the two companies, had been trading near $70 a share this time last year. It has been steadily falling since then as the housing crisis has worsened, and today it plunged nearly 14% and closed at $13.20. Naturally, executives at these companies rushed to assert that they were healthy and sound, and one even mentioned that William Poole has for a long time been a critic of the company (kill the messenger, even though he has been right for years). Henry Paulson, Secretary of the Treasury, said the regulators for these companies assured him that they were well-capitalized. The market paid no attention. Government assurances about “well-capitalized” financial firms has lost virtually any credibility since Bear Stearns. One of the things we’ve often mentioned here is that Fannie Mae and Freddie Mac have been allowed to operate on the flimsiest amounts of capital – 2% of assets compared to 8% of assets for commercial banks. This leniency is coming home to roost. Fannie Mae has something like $30 billion in available capital to cover any losses, yet it owns hundreds of billions of mortgages on its balance sheet, and has guaranteed the performance of trillions of dollars more. This is really the point Poole is making: even a modest percentage of losses on such a huge portfolio would wipe out $30 billion in capital...