Crank your mind back to 2006. You are a run-of-the-mill hyper bear (as I appeared at the time). Someone told you that in 2008 there would be a crisis at Fannie Mae and Freddie Mac. The Secretary Treasury would ask for and get an essentially unlimited pool of government money to ensure that the senior debt of those institutions did not fail. [He said nothing about the preference shares or common.]
What would you have thought would happen?
To me it seemed obvious. The senior debt would now be as safe as Treasuries and the spread on the senior debt would come in to maybe 30bps from crisis levels.
But the whole scenario would be very bad for the US dollar because the implied debt of the Federal Government just rose an awful lot.
So what did happen?
Well the spread on Fannie and Freddie securities widened not narrowed, and the US dollar got strong.
The widening of the spreads on Fannie is either irrational or a rational bet that the US Government cannot be trusted to honour its promises. But if it is the latter why is the USD strong?
What is happening now is every bit as weird as what happened in the bubble.