The U.S. Federal Reserve and the Treasury announced plans Sunday to shore up the troubled mortgage giants Fannie Mae and Freddie Mac. Shares for the two companies have plunged as their financial survival has been put in doubt, with the companies losing about half their value last week. Shares for Freddie Mac fell to less than $4, as compared to $67 a year ago.

In an effort to both bail out the two massive, government-sponsored housing lenders as well as reassure investors worldwide, Treasury Secretary Henry Paulson, speaking from the steps of the Treasury, asked Congress for authority to buy shares in and lend to the two companies. In a separate measure, the Federal Reserve authorized the firms to borrow directly from the central bank.

Bloomberg reports,

The announcement followed crisis talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week. Paulson and Fed Chairman Ben S. Bernanke are trying to prevent a collapse in the companies that would exacerbate the worst housing recession in 25 years and deepen the economic slowdown.Paulson’s proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt.

These moves come after Federal Reserve Chairman Ben Bernanke and the treasury secretary said last week that the firms were adequately capitalized. That means there was no apparent need for investors to fear their collapse. However, the track record of public statements by officials is one of inaccuracy at best—bordering on deception at worst. The market may be starting to question their integrity.

The first time Bernanke and Paulson said everything was okay was in the first half of 2007, when problems in the mortgage market were supposedly “contained” to subprime lending. The next time everything was supposedly okay was when the Securities and Exchange Commissioner said Bear Stearns was solid—and then days later Stearns imploded, wiping out billions overnight. Investors probably also remember how problems in the housing market supposedly would not spill over into the general economy and job market—a claim now disproven by several consecutive months of job losses. And consumers remember being assured that high oil prices didn’t really matter so much because they don’t affect the U.S. economy as much as in the past.

Fannie Mae and Freddie Mac together guarantee or own almost half of all home mortgages in America. If the government was to step in to shore them up, it would have to take on more than $5 trillion onto its books. The current federal debt is already more than $9 trillion. A government bailout that large could have huge ramifications for the dollar, the bond market and the nation’s credit rating. The International Herald Tribune reports:

For years, anyone warning that Fannie and Freddie should beef up their financial positions was ridiculed or run over by the lobbying machines these companies kept oiled and close at hand. So their lucrative arrangement remained the same: business as usual, with all its riches, was the goal. After all, wasting money by inflating their cash cushions would just crimp their style. …Which brings us to the main problem: credibility. …The surprise is not that Fannie and Freddie grew too large for the taxpayers’ good. …Rather it is that Congress and the various financial regulators, especially the Fed and the Office of Federal Housing Enterprise Oversight, did little to keep the companies from getting out of control.

The economic system, which has come to function largely on greed and debt, is about to come tumbling down. The credibility of the system is under review, and America’s foreign creditors don’t like what they see.