US taxpayers bear the loss

Read this story about the burden that will be shouldered by the US tax payers over the losses that are suffered by Fannie Mae and Freddie Mac: http://www.cnbc.com//id/46106075

Here is the background to this state of affairs:

• The real estate market in the US was a bubble for one or two decades before it finally burst in 2008
• During this period, large profits were made by developers, real estate agents, mortgage bankers and other people connected with the trade
• The home owners were enticed to pay high and unsustainable prices for the property
• The purchases were funded by mortgage banks and insured with Fannie Mae, Freddie Mac and other insurers
• Bad financial products such as sub-prime mortgages and collateralized debt obligations (CDOs) were created to fund these unsustainable prices

With the bursting of the bubble, the drop in real estate prices have to be shouldered by the home owners, the mortgage banks and the insurance agencies. A significant part of the losses are now taken over by the taxpayers.

A lesson to be learned - if the real estate prices are allowed to appreciate to an unsustainable level, it will have to burst one day and bring big damages to the economy and the people. Several countries have gone through this phase. Other countries, including Singapore, will have to follow. There is no escape from the inevitable.