World markets are cheering the U.S. government's support for the mortgage giants Fannie Mae and Freddie Mac.  This morning, the dollar is rising, European stock markets are higher, and futures of U.S. stock indexes and even the futures for Fannie and Freddie are pointing to an opening rally.

"The U.S. authorities are doing everything they can to prop up the financial system, " Peter Dixon, an economist at Commerzbank in London, told Reuters. "It's good news in an unremitting cycle of gloom."

But stepping in to give support when in the past such backing had only been implied, Washington has crossed a Rubicon that puts the economic credibility of the United States to the test.

As Clive Crook puts it in the Financial Times: "U.S. taxpayers are about to find out what their long-standing and (strictly speaking) non-existent guarantee of Fannie Mae and Freddie Mac will cost them. One way to think of it is this: Take the US national debt of roughly $9 trillion and add $5 trillion. Not bad for an obligation still officially denied."

Fannie and Freddie were created by Congress in the 1930's, but are now owned by shareholders. Their special status as government-created corporations, however, has given them the implied backing of the federal government and their borrowing costs have been cheaper as a result. Combined, the two companies have some $5 trillion in mortgage-related debt.  The stocks of the two have been in a free fall and their solvency questioned.

On Sunday, Treasury Secretary Henry Paulson said he would seek Congressional approval to buy billions of dollars of stock of Fannie Mae and Freddie Mac if they need it, as long as the two firms have adequate capital to continue their mission of buying and selling mortgage loans. It also will seek approval to temporarily increase lines of credit for the two companies. And it will propose that the Federal Reserve take a greater role in the oversight of the mortgage giants.

The Fed, meanwhile, said it would allow Fannie and Freddie to borrow from it through the central bank's New York facilities.

The immediate reaction to the moves has been generally positive.

Even a critic of the administration, Paul Krugman of the New York Times, was supportive, saying "And let's be clear: Fannie and Freddie can't be allowed to fail. With the collapse of subprime lending, they're now more central than ever to the housing market, and the economy as a whole."

Indeed, after the mortgage market imploded Fannie's and Freddie's share of the secondary market in mortgages has grown from 40 percent to two-thirds.

But others are skeptical of the Treasury effort:  Mike Shedlock says:

"In the course of a few days we have seen Paulson go from saying ‘financial institutions must be allowed to fail' to requesting Congressional ‘authority to buy unlimited stakes in and lend to the companies.'

Paulson now seems to be acting on the principle that as long as one is telling lies there is no additional harm in doing it with gusto. Otherwise it is very hard to explain how an "unlimited lending line" can possibly have "terms and conditions necessary to protect the taxpayer".

There is one other possibility. Perhaps as Paulson crossed the Rubicon he landed in the 5th dimension. In some alternate universe, his statements just might make sense.

Yves Smith on Naked Capitalism notes:

"Oh, minor detail, the plan still has to be approved by Congress, which will hopefully roll over. But what if it doesn't? Anyone with an operating brain cell knows that these moves put the US on the path to having taxpayers assume Fannie and Freddie liabilities. That in the end is probably unavoidable."

The weekend rescue by the government will come into focus tomorrow, when Ben Bernanke, the chairman of the Federal Reserve, appears before Congress.