As long expected, the Big Big Bailout of Fannie Mae and Freddie Mac is now a reality.

The government has formulated a plan to put troubled mortgage giants Fannie Mae and Freddie Mac under federal control, dismiss their top executives and prop them up financially, federal officials told the two companies yesterday, according to three sources familiar with the conversations.

Under the plan, which could prompt one of the most sweeping government interventions in financial markets in U.S. history, federal officials would place the firms under a conservatorship, a legal status giving the government the option and time to restructure and revive the companies, the sources said. The value of the companies’ common stock would be diluted but not wiped out, while the holdings of other securities, including company debt and preferred shares might be protected by the government.

Instead of giving each company a big capital infusion upfront, the government could make quarterly injections as the companies’ losses warrant, the sources said. This would be an attempt to minimize the initial cost of the rescue.

The timing of government action remained unclear last night, and the final details were still under discussion. But as the pace of discussions accelerated, Treasury officials contacted senior congressional leaders yesterday, telling them they might be briefed on the plan this weekend and asking for telephone numbers where they could be reached.

And with this plan now a certainty dictated by a crumbling economy and 2008’s growing job losses taking America to a 6.1% unemployment rate and rising, the era of the free-wheeling free market has officially come to a crashing halt.  

The Fed has just admitted that the housing market has brought down America’s economy.  The real story here is that America is on the brink of financial collapse and only an unprecedented multi-billion dollar bailout of Fannie and Freddie will stave off imminent ruination of America.

You can throw out both Barack Obama’s and John McSame’s financial plans.  The next President of the United States of America is going to be facing an economy on life support.  There will be no Federal funds for universal health care or investment in new energy sources.  With the Iraq and Afghanistan wars draining billions daily and now The Big Big Bailout thrown into the mix, America’s $10 trillion national debt is on the verge of detonation.

Now couple that with the fact that America’s level of consumption is plummeting.  We can’t afford goods and services like we could before, and the rest of the global economy is slowing down now too.  That means foreign countries are unable to sustain America by importing goods we export.

Home prices continue to fall, consumption continues to fall, exports continue to fall, job generation continues to fall, consumer confidence continues to fall, real wages continue to fall, discretionary income continues to fall…all of this is leading up to a massive deflationary event in 2009.  The American consumer is beyond tapped out now.

And now with the Fed about to take over as America’s mortgage guarantor, taking on ANOTHER $12 TRILLION in leveraged debt, the chance of a cascading failure across the markets only increases.

Everything the Fed has done to rescue America’s economy over the last 24 months has failed.  More than ever our economy exists because of foreign countries servicing our catastrophic debt.  Now this debt is beginning to drag down the economies of those foreign countries as well.  What happens when China and Japan and other countries stop buying our debt?  What happens when they realize — as they are starting to do now with the failure of Fannie and Freddie — that we will never be able to pay them back?

The UK economy is now falling apart.  The housing crisis is spreading into London, Toronto, Dublin, Sydney, and more.  It’s going global, and Asia’s markets are down almost by half from their highs last year.

The Big Big Bailout is a bailout of the world’s central banks that hold Fannie and Freddie debt…hundreds of billions of it.  China has well over $300 billion just in Fannie/Freddie debt.  If Fannie and Freddie aren’t rescued, that debt will collapse America’s economy and the global economy with it.  The Fed is playing its next to last card in its hand with The Big Big Bailout.  It has to, or the consequences will be a tsunami of global bank failures and a Second Great Depression.  The Fed has no choice.

The last card is hyper-inflation.  Everything up until now has failed to stabilize the markets and crack the credit crunch and stop the housing depression.  The Big Big Bailout will do nothing to correct the problem…only delay the effects of waiting to play the last card.

The engine of world economic growth has been the American consumer and the China/India markets allowing the purchase of debt to fund our consumption.  Both of those have now come to an end.  They are reeling.  The global market has stalled out.  The world is trying to find a way to restart the global engine.  They can’t.  The engine has seized up and is going to require replacement.

The Fed is now in pure panic mode.  From this point on we’re in the Twilight Zone.  When the massive deflationary event hits next year, the Fed will play the hyper-inflation card in an attempt to reinflate the dollar.

And after that…the game ends.

And a new one begins.

Be prepared.

Cross-posted at ZVTS.

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