What will we do if big two go bust?

They don’t know it, but taxpayers stand to lose billions as the housing bubble bursts. And in a bipartisan effort to “do something” to save the housing market, President Bush and the Democratic Congress appear set to put taxpayers on the hook for billions more.

Until now, losses in the housing world have been confined to homeowners, mortgage lenders, banks and investors in toxic mortgage securities. But by virtue of the implicit federal guarantee backing mortgage giants Fannie Mae and Freddie Mac, U.S. taxpayers may be one of the largest mortgage lenders in the world – set to lose billions, like all the others.

Between them, Fannie Mae and Freddie Mac back more than $4 trillion in mortgages. If they fail, it could force an unprecedented taxpayer-funded bailout. And they are much closer to failure than most people realize.

Some saw this coming, including presidential candidate Ron Paul. As far back as 2002, Mr. Paul – whose candidacy I’m not actively supporting – predicted the Federal Reserve would blow up the housing bubble.

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