Will Fannie Mae and Freddie Mac have to be bailed out by taxpayers? I have no inside information, but I’d say yes, for two reasons.

First, as Reinhart and Rogoff document, big financial crises always end with an expensive bailout of the banking system. It happened in Sweden, it happened in Japan. Why should we be different? Except that in this case banks proper took on very little of the risk; Fannie and Freddie, on the other hand, took on a lot of it.

Second, the housing bubble was immense; see the figure above, taken from the always excellent Calculated Risk. Fannie and Freddie only guaranteed conforming loans — loans that weren’t that big, didn’t have exotic financial features, and required a substantial downpayment. But so what? If real prices of houses in places like LA return to historical norms — and there’s no reason to think they won’t — many, many borrowers with conforming loans will end up with big negative equity anyway, and this in turn will produce a lot of defaults.

This crisis is a long way from being over.