It’s worth repeating: “The U.S. is not out of the woods.”

These are the words of Harvard professor and former IMF chief Kenneth Rogoff, who warned investors this week that “the worst is to come” in the credit crisis. Rogoff predicted a “whoppper” of a bank is going to go under, probably one of the toxic twins, Fannie Mae (NYSE:FNM) or Freddie Mac (NYSE:FRE).

Bryon King in Penny Sleuth says we are witnessing a “tectonic shift” in national economic policy. The Bush administration has massively expanded government’s role in finance. It will have disastrous consequences for the dollar…

The excess credit creation by the U.S. over the past 10 years has been a policy failure of historic proportions. We witnessed serial bubbles in technology, dot-coms, housing and now energy and commodities. These bubbles were related to horrible distortions within the larger financial system.

Thus, within the past year, the lame-duck Bush administration has presided over a huge expansion of the government’s role in finance. The Bear Stearns bailout brought about a sea of change in policy. Now investment banks, not just commercial banks, may borrow directly from the Federal Reserve.

More recently, the Fed announced that it would lend to Fannie Mae and Freddie Mac. These two nominally independent firms guarantee or own half the mortgages in the U.S. And not to be outdone, the U.S. Treasury also stated that it would intervene to buy the agencies’ stocks if they stayed under pressure from short sellers.

Perhaps this is not quite the scope of FDR’s New Deal. Then again, the New Deal was about building roads, bridges and dams, not bailing out failed banks.

But the new government intervention to bail out large financial players signals a remarkable change in national economic policy. And it has not come about at the behest of the voters.

This new set of government guarantees to investment banks and Fannie and Freddie will be difficult — perhaps impossible — to reverse. Thus, the new situation will simply be “the way things are” when either President McCain or President Obama takes office.

What will this mean to the future of the U.S. dollar? Among other things, it means that the federal government will be spending tens or hundreds of billions of dollars to bail out bad investments by investment banks and Fannie and Freddie. And in turn, the government will not be spending dollars to fix national infrastructure like roads, bridges or water or energy systems.

And long term, it is probably bad for the value of the dollar. Which is why you should be sure to preserve some of your savings and purchasing power in precious metals like gold and silver.

Eric Roseman, investment director for The Sovereign Society, says the bailout of Fannie and Freddie is inevitable. There’s a good chance markets will crash and government bond yields will plunge, if it doesn’t happen soon…

Until the housing market finally establishes a bottom, Fannie and Freddie are going to remain under pressure. Balance sheets at both companies continue to hemorrhage while home values plunge and both mortgage and refinance application numbers tank.

Home prices are now down 10% year-over-year and mortgage and refinance applications are down a heavy 37% and 44%, respectively. Those figures are outright bearish and suggest investors have run out of patience with Fannie and Freddie.

Instead of playing political football and jockeying around the bailout issue, the Treasury and Congress should just bailout Fannie Mae and Freddie Mac. It’s inevitable anyway. I think the Feds are waiting for the housing market to bottom before officially entering the mortgage business. No dice.

We already know Secretary Treasury Paulson has given the markets an implicit guarantee that the federal government won’t allow these giants to fail.

So if that’s the case, just bail them out already! Shareholders will get wiped-out in the process and the United States will officially be in the mortgage business.

Credit markets remain on edge. Stocks worldwide are plunging, non-government bond markets are reeling and most commodities remain in a vicious downtrend since hitting multi-decade highs in July.

Deflation, not inflation, is now the markets’ primary focus. Housing woes are adding pressure to deflationary trends in the United States and now, Europe. Again, the main threat since July to global markets is deflation.

The federal government will bailout Fannie Mae and Freddie Mac with taxpayers naturally footing most, if not all, of the bill. If the Feds don’t orchestrate a bailout soon, there’s a good chance markets will crash and government bond yields will plunge. It’s that serious.

Source: Economic Tectonics; I Smell Another Bailout Coming for Freddie and Fannie