“Opening doors” was once the slogan of the US Federal National Mortgage Association, colloquially known as Fannie Mae. American taxpayers now face the displeasing irony of playing an involuntary role in keeping the doors open at Fannie Mae and its sibling, Freddie Mac (the Federal Home Loan Mortgage Corporation).

This week the US Treasury Secretary, Henry Paulson, announced measures to maintain confidence in these two institutions. The proposals are necessary, but a palliative only. They must not postpone urgent consideration of how the idiosyncrasies of the US housing market have increased systemic risk in the world economy.

Fannie Mae and Freddie Mac serve as the foundations of the US housing market. They are publicly quoted companies that fund and guarantee mortgages. They do not lend directly to home owners; rather, they serve as intermediaries between mortgage lenders and investors. By buying mortgages from lenders and selling them to investors they provide funds to the housing market at a lower cost than would be the case with commercial banks.

These agencies are, in effect, state-sponsored wholesale mortgage lenders. Therein lie the problems. One is that they have been exposed to the slide in US house prices. Fannie and Freddie guarantee or own almost half of the entire $12 trillion US mortgage market. American houses have slumped in value, leaving the agencies sitting on billions of dollars in potential losses. Investors began to worry last week that the businesses were not solvent. The share prices halved.

This triggered the second problem: ownership. Are Fannie and Freddie owned, guaranteed or just loosely backed by the Government? The answer dictates not only the long-term security of the businesses but also their ability to borrow cheaply, and therefore their raison d’être.

Mr Paulson has half-answered that question. He has increased their available lines of credit, and undertaken that the Treasury will buy equity in either company if necessary. These so-called Government-Sponsored Enterprises are integral to the US housing market. If they failed, the consequences for the economy would be grave. But there are serious costs in shoring up Fannie Mae and Freddie Mac. Washington has stood up for Fannie and Freddie; it is not clear that Washington is willing to stand behind them by taking on their liabilities in the event of failure.

In addition, the Treasury’s implicit guarantee is an incentive to act irresponsibly, because it is the taxpayer who in the last resort will pick up the bill. The activities of the GSEs are a nice instance of taking risks in the interests of shareholders, while the costs fall on the public.

Fannie Mae and Freddie Mac have contributed much to the parlous state of the US housing market and hence the world economy. They originated the practice whereby mortgage loans are packaged into marketable securities and distributed to end-investors. An instrument intended to reduce risk has ended up merely spreading it. Banks and investors made a fortune by creating new financial instruments that packaged and repackaged Fannie and Freddie’s debt. The public is paying to clean up after the party. Policymakers must attend to the longer-term viability of a system that can produce such a perverse mismatch of rewards and costs.