Published: Friday, 25 Sep 2009 | 11:27 AM ET

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"If you've got me," Lois Lane once asked Superman as he flew to her rescue, "Who's got you?" We could point that same perplexed question at the U.S. government and its ranks of overwhelmed financial agencies, which are now in bigger danger than the nation's banks ever were.

It's no surprise that the $19 trillion stimulus spending spree would take a toll. While Wall Street is enjoying a giant, inexplicable bull-market rally on the back of seemingly infinite government support, the paint is chipping on the old house down in D.C. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke are scaling back emergency lending programs like a fashionista returning expensive dresses before the credit-card bill comes due. The official gloss for the government's stimulus scale-down is that good times are coming again and we don't need to keep supporting banks, money-market funds, and private equity firms with expensive programs. Geithner soothed that we are "back from the brink," and Bernanke declared that the "recession is over." But the bigger reason the Obama administration is pulling the baby bottle away from corporate America is that the overextended federal government is now starting the slow and ugly business of bailing itself out.

You can already see the signs of bailout strain on federal agencies. The Federal Housing Administration, which insures lenders writing new mortgages, is running low on cash and is below its congressionally mandated reserves. The Federal Deposit Insurance Corp., which is funded by bank fees and has been dolloping out money to failing banks, has also dipped below its legal reserves. The FDIC may actually need those banks to turn around and save it, and could even tap a Treasury bailout despite a year of protestations about its financial health. Geithner said he would slash the government's plan to buy toxic assets from banks by two-thirds, to a mere $30 billion from $100 billion. Meanwhile, Geithner is preparing to beg Congress for an increase on the debt ceiling—a limit on federal borrowing already set at $12 trillion—which we could hit as early as mid-October because we're spending so much on stimulus plans. That's quite a sketchy bill of health for a system that's allegedly "back from the brink."

Look deeper, however, and the government isn't really quitting its bailouts at all. It is just shifting strategy away from banks and financial services to a new set of quieter bailouts, centered on the housing and real estate markets in general and Fannie Mae and Freddie Mac in particular. In this way, the administration's actions are meshing with the wishes of House financial services committee Chairman Barney Frank, who said last year, "I want at least two years with President Obama and a solidly Democratic Senate so that we can get the federal government back in the housing business." Now it is, even to the point that the government is at risk of creating another mortgage bubble. We just have to see if the government can handle it.

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The government has to concentrate all of its resources on keeping the housing and real estate markets stable because the government is now the single biggest investor in mortgage-backed securities. It bought more than 80 percent of all the mortgages issued by Fannie and Freddie. What this means is that if homeowners start to fall behind on those mortgages in even bigger numbers than the current 9.24 percent default rate, the government is in deep trouble, starting with the Federal Reserve. The Fed's own balance sheet—its financial holdings—has ballooned to $2.1 trillion from just $800 billion a year ago. One-third of the Fed's balance sheet is weighed down with $625 billion of troubled mortgage-backed securities, once floating around the market and now invited to stay in Uncle Sam's own accounts.

The government is aiding the housing market in several ways. One of the biggest is the Fed's own monetary policy, which keeps interest rates at zero and mortgage rates low. Another way is a series of plans and political pressure designed to help homeowners modify mortgages. And another is a $1.45 trillion Federal Reserve program designed to buy mortgage-backed securities, many issued by government-backed Fannie Mae and Freddie Mac. The Fed just agreed this week to start winding down this program, but consider this: Morgan Stanley’s

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[MS  Loading...      ()   ] trading desk believes the Fed is scaling back on Fannie and Freddie buys because there's so little paper left. And why is there so little paper left? Because the Fed has been, all year, the biggest buyer of Fannie's and Freddie's mortgage-backed securities; the ones the Fed hasn't bought have been snapped up by enterprising traders hoping to sell the Fannie and Freddie bonds back to the government at a fat profit.

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