Holy smoke.

Dunno if you’ve been following the market plunge today, and how it all related to Fannie Mae and Freddie Mac. As of right now, the government is not going to take over the two struggling agencies; but according to the NYT, there’s been discussion about doing just that:

Under a conservatorship, the shares of Fannie and Freddie would be worth little or nothing, and any losses on mortgages they own or guarantee — which could be staggering — would be paid by taxpayers.

The government officials said that the administration had also considered calling for legislation that would offer an explicit government guarantee on the $5 trillion of debt owned or guaranteed by the companies. But that is a far less attractive option, they said, because it would effectively double the size of the public debt.

Emphasis added. In other words, we the taxpayers could still be saddled with an obligation unlike anything we’ve ever seen before.

Numerian over at The Agonist says the crisis at Fannie Mae and Freddie Mac could actually push the U.S. economy into a depression, not merely a recession:

The problem here is that one of the biggest owners of agency securities, to the tune of hundreds of billions of dollars, is the government of China. China will not sit by idly while their reserves are devalued. They will either come to some agreement with the U.S. government on receiving an exchange of Treasuries for agency securities (just like having access to the Fed discount window), or they will judiciously dump these securities on the open market soon. They may already be selling some of their holdings now, which would explain the severe drop in agency bond prices this week.

The housing market is already under excessive stress, yet consider that over 75% of all mortgages issued this year have been sold to or guaranteed by the agencies. If you remove this bulwark for the housing market, the market itself falls apart completely. The U.S. will return to the primitive world of the 1960s, when home mortgages were difficult to achieve because the banks that issued the mortgage were forced to hold on to them for up to 30 years, taking on all of the default risk.

This, apparently, is what boom times look like to Phil “Let the whiners eat cake” Gramm. Except that boom is actually the sound of an implosion.

Update: Well, that didn’t take long:

Sen. Christopher Dodd, D-Conn., the Senate Banking Committee chairman, raised the prospect that the companies could be given access to emergency Federal Reserve lending.

Dodd, who spoke Friday to Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson, said the two are “looking at various options” for propping up the firms if they ultimately need help. Those include giving them access to the Fed’s emergency lending “discount window,” Dodd said.