The recent taxpayer bailout of China and PIMCO has been sold to the public as an attempt to keep the mortgage market working. The mortgage market is working. Houses are too expensive, and they are coming down in price. People who blame foreclosures for falling property values have it backwards. People are getting foreclosed on because they bought more house than they could afford, and now that property values are falling toward sane levels, these people cannot refinance out of their unaffordable loans.

Recently, people have stated that there was an implicit guarantee on Fannie and Freddie debt. However, this was a fiction invented by the investors. Congress and the US Treasury issued many statements over the years that the debt was not backed by the US Government. Those statements stopped being issued a few years ago. Bill Gross, fund manager of PIMCO, has frequently taken advantage of this silence through his own PR efforts. Apparently, if you get in the media enough, your statements become fact.

People are cheering this news as good for the housing market. Fortunately, some intelligent people see it for what it is: an illogical mess.

From Mr. Practical at Minyanville Death of Fannie, Freddie Only the Beginning:

Now, if you assume that those with capital are logical, that they can discern between a good investment and bad (which is logical since they accumulated money in the first place), then it must be illogical for the government to step in and take their place. If you understand that then you understand how we got in such a mess: the government decided that everyone should have access to cheap loans when savers, savvier investors who have accumulated money, said no.

Awesome.