receivership and restructure them. This could take place without Congress having to pass a resolution explicitly guaranteeing all $5 trillion of the GSEs’ liabilities. That dreaded scenario would double the size of the public debt and drive the dollar to new lows.

This episode demonstrates how stupid and dangerous it is to allow any company to operate under the assumption that it keeps the profits while the taxpayers take the losses.

For now, the U.S. has to make clear that it is standing behind Fannie and Freddie and will not allow them to fail. But to prevent an even worse catastrophe in the future, Fannie and Freddie should be broken up or dramatically downsized. It may sound strange for conservatives to back a government takeover of any company, but a takeover aimed at restructuring, downsizing, and eventually reprivatizating the GSEs might be the least bad option if a run on them actually materializes.