A telling story Tuesday in the New York Times suggests that Congressional Democrats knew they’d been taken for a ride after this weekend — that the current administration was able to pull it off is somewhat stunning:

Mr. Dodd all but accused Mr. Paulson of misleading Congress less than two months ago when the Treasury secretary prevailed upon lawmakers to give him the authority to spend untold billions of dollars to rescue the two companies, assuring them at the time that he had no intention of using that authority. “We accepted him at his word that all he needed was the authority and that he wasn’t going to exercise it. Then he used his authority very aggressively,” an angry-sounding Mr. Dodd said in a telephone conference call with reporters. He indicated that he would approach any future commitments by the outgoing administration more skeptically. “Fool me once, your fault,” he said. “Fool me twice, my fault.” Asked whether he felt duped, Mr. Dodd said, “I was born at night but not last night. I heard experts over the last few weeks predicting this outcome. But I responded that I take the administration at their word. To find out late Friday afternoon that it was going in this direction, it was hard to believe.” He also suggested that the two companies might have been a victim of efforts by conservative ideologues to eliminate them, adding that some kind of successor institution must carry out the functions of Fannie and Freddie for the housing market to function smoothly.

I rarely find myself agreeing with Dodd, but his last point is one anyone in the mortgage or broader financial markets must consider. We’ve been told that the government will look to limit growth in mortgage holdings this year and next, and then start to shrink the portfolio holdings of both Fannie and Freddie in the name of “reducing systemic risk.” Yet we’re also being told that the government will work with the GSEs to reduce g-fees and loosen credit restrictions in the name of making mortgages more available. You can’t have your cake and eat it too, and I fear we’re being fed a line of B.S. here for anyone willing to look at the import of what’s actually being sold to the American public. I invite HW readers to explain just how it will be possible to simulataneously shrink the GSEs market presence, while also moving to expand the availability of mortgages at the same time. Dodd’s point is a prescient one; if we’re serious about maintaining liquidity in the markets long-term, someone has to be purchasing mortgages. And if we’re intent on reducing Fannie and Freddie’s role in the name of managing systemic risk, just who is supposed to fill the void that will be created by pulling back on the reins? It’s not as if there are a bunch of private-party investors chomping at the bit to get into mortgages these days.