The Discount Window is always open

Wanna hear something funny?

Fannie Mae and Freddie Mac extended their rebound from last week's near-meltdown that prompted a government rescue plan and the opening of the Federal Reserve discount window to provide funding to the mortgage finance giants.

OK, so that's not all that funny - in fact, it's just a government-engineered short squeeze - but this part is pretty funny:

The Fed's discount window is not open to just any schmuck who walks in the door asking for a loan. You have to be big and either really rich or (more likely) really poor. But most importantly, you have to have collateral. Citibank can slither up and get some cheap money, but they have to provide ultra-safe collateral that will still have value if they go bust. The whole idea of collateral is that it's an asset that does not rely on your own ability to repay.

Now on the Fed's discount window collateral page, there is a list of acceptable securities, and one of these just happens to be "Obligations of ... government sponsored enterprises." GSEs. Like Freddie and Fannie. Citi can use Freddie and Fannie bonds as collateral because they are safe*.

As of this week, so can Freddie and Fannie.

Which means that there is actually no need for Paulsen's scheme to back Freddie and Fannie with unlimited amounts of taxpayer money through an act of Congress**. If they want money, all they have to do is create a security from nothing which they can use as collateral to borrow money from the Federal Reserve, which creates it from nothing.

Pretty sweet, huh?

* because if the bond pays off, you win; if it defaults, the government will give you your money back so you can try again.

** In which case the government would borrow money at interest from the Federal Reserve, which would create it from nothing, and then re-lend it to Freddie and Fannie, who would then re-lend it to banks who would then re-lend it to people who can't afford to buy the houses they want. This is called "free market capitalism."