PAULSON DESERVES PRAISE FOR MOVE

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In July, explaining his contingency plan for emergency support of Fannie Mae and Freddie Mac, Hank Paulson, Treasury secretary, told the Senate banking committee: “If you have a bazooka in your pocket and people know it, you probably won't have to use it.”

That is doubtless true, but once in a while you are obliged to prove you are not bluffing. So it proved with Fannie and Freddie.

July's announcement that the government was ready to lend without limit to keep the agencies going appeared to work at first. Certainly, the promise was credible. The Treasury knew, and the markets knew the Treasury knew, that the agencies could not be allowed to cease functioning.

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In the end, in spite of a cost to taxpayers in the tens of billions – and before this is over maybe hundreds of billions – yesterday's move was uncontroversial. Both presidential candidates back it, recognising the need to keep mortgage finance flowing. Differences are likely to arise over the terms of the nationalisation, however.

Shareholders in the entities should get nothing: the agencies have failed through their own incompetence. Both boards should be dismissed, as the Treasury's plan is reported to require. The longer-term goal – for the next administration, at the earliest – should be to get the government as far as possible out of the housing market.

That means breaking Fannie and Freddie into pieces small enough to fail, and privatising them. If the function they discharged – providing liquidity to the mortgage market – cannot be profitably undertaken without an implicit public subsidy, then it should not be undertaken at all.

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Fannie and Freddie – hybrids that are privately owned but “government-sponsored” and that own or guarantee more than $5,000bn (