The Bush administration seized control this week of the scandal-ridden mortgage giants Fannie Mae and Freddie Mac as the drive for profits by the corporate executives running them threatened both the financial markets and the entire U.S. economy.

President Bush, departing from his almost religious belief in an unregulated “free market,” said the government takeover was necessary to keep Fannie and Freddie from collapsing, an option he called “unacceptable” for an already battered economy.

The move comes after many months of skyrocketing mortgage rates, sinking demand for homes by buyers, plunging home values, mortgage foreclosures and a growing lack of affordable housing generally.

The two giant lenders were on the verge of a collapse that could have all but destroyed the ability of most Americans to get any type of home loan, auto loan or any other form of credit and could have destroyed the ability of countless businesses to finance their operations. In addition, financial markets around the world could have been dealt severe, if not deadly blows.

The two companies, which together own or guarantee about $5 trillion in home loans, about half the nation’s total, have lost $14 billion. The likelihood is that the losses would amount to only the tip of the iceberg as the housing market continues in its slump.

Fannie Mae (the Federal National Mortgage Association) was created in 1938 as part of President Franklin Delano Roosevelt’s New Deal. Private lenders refused to give home loans during the Great Depression when the housing market collapsed. It was the new government bank’s job to provide local banks with federal money to finance home mortgages at low interest rates. This resulted in increasing levels of home ownership and the availability of affordable housing.

It also eventually led to the development of what is now called the secondary mortgage market. This came about because Fannie Mae borrowed from foreign investors at extremely low interest rates it could get because it had the backing of the U.S. government. Fannie Mae’s profits came from the difference between the low interest rates paid by American borrowers and the even lower rates charged by foreign lenders. From the 1930s until the 1960s Fannie Mae had the monopoly on this secondary mortgage market.

In 1968, however, Fannie Mae became a “government sponsored enterprise” (GSE). This was a scheme to essentially turn it into a private corporation replete with private executives in charge and stockholders to which it was now beholden. Since the new GSE also had a “public” mission to provide affordable housing, it was given exemption from taxes, regulation and oversight. The Lyndon Johnson administration wanted to unload it from the federal budget partly to hide from the public the devastating effect on that budget of the war in Vietnam. There was some objection to turning over to an essentially private corporation the monopoly on the secondary mortgage market. Therefore Freddie Mac (the Federal Home Loan Mortgage Corporation) was formed soon after to help quash that objection. Now there were two GSEs and no single company had a monopoly.

The privatization scheme spurred enormous growth for the mortgage giants. The current assets of the two companies combine for a total that is 45 percent greater than that of the nation’s largest bank.

The benefits of becoming a private corporation while holding onto tax exemption and government handouts funded by taxpayers did more than just spur company growth, however.

Since the 1990s, like the Wall Street financial giants, Fannie Mae has turned into a government-backed wealth generator for its executives — private wealth gained at the expense of a working class that is paying the taxes.

From 1990 to 2000 the value of the company’s stock grew 500 percent as James Johnson, its CEO, earned nearly a billion dollars — a huge amount, particularly for that time, and without precedent for a “government sponsored enterprise.”

District of Colombia officials, in the 1990s, mounted challenges to this privileged status. They said that with so many people at Fannie Mae becoming rich, the company should pay some taxes to the cash-starved city.

To head off objections like this in the future, CEO Johnson responded by putting former elected officials and government figures into top executive positions. Their jobs were just as much to lobby friends in government as they were to help manage the company.

The thing to watch, now, is how the government will use its takeover of the companies. Will it say they got too big and should be broken down into smaller private companies? Or will the people’s movements be able to exert the pressure needed to reverse the privatization schemes altogether and return the business of mortgage assistance for affordable housing to a trustworthy public body in the spirit intended during the New Deal?