by Rick Newman

The bailout of Fannie Mae and Freddie Mac has cost about $112 billion so far and could ultimately reach $300 billion or more -- a far bigger wipeout than even AIG. Both firms are effectively nationalized, and the government would probably wind them down except for one thing: They underwrite about three quarters of all mortgages issued in the United States.

You may have heard that a recovery is supposedly underway, that the economy is growing again, and that some firms may even start hiring soon. But Fannie and Freddie highlight some of the pitfalls we face on the road back to prosperity.

Large chunks of the U.S. economy remain addicted to financial painkillers or dependent upon dysfunctional institutions like Fannie and Freddie. As the government begins to withdraw vast amounts of aid this year, it will test whether the economy can stand on its own.

We'll be lucky if we can avoid these complications:

Housing tanks all over again.

In addition to subsidizing the entire mortgage market via Fannie and Freddie, the government has kept money flowing to consumers by buying billions in mortgage-backed securities, offering tax breaks meant to spur demand for homes, and mounting other programs to reduce foreclosures and arrest the plunge in prices.

As those programs begin to expire or wind down, private lenders and normal market demand need to kick back in. If they don't, it could trigger a fresh housing crisis that craters confidence and inflicts more collateral damage on the rest of the economy.

Stocks crash.

The bull rally that followed the bottoming of stock prices in March 2009 eased a sense of panic and helped restore some of the wealth lost in the housing bust. But while stocks have been surging, jobs have continued to disappear, and this divergence between Wall Street and Main Street must end. Usually, stocks foretell a pickup in the "real economy," which follows the market's recovery after a lag. But it's possible that the moribund job market could exert the stronger gravitational pull, dragging down stocks and triggering a double-dip recession.

There's a U.S. debt crisis.

This is also the year that President Obama has promised to start tackling America's $8 trillion public debt, which equals more than half of our total economic output. There will be careful efforts to make sure that no deserving American feels any pain (the rich don't count as deserving) and that Congress passes no measures that would get anybody unelected. The financial markets might buy this, or they might decide that America is headed toward insolvency and dump the dollar, which would force the government to pay higher borrowing rates, slash spending, and hike taxes.

Consumers become rational.

Americans need to save more. Some are, but it's not clear yet if they will save more over the long term or go back to spending nearly everything they have. The savings rate has crept up to about 5 percent and will probably go higher. If it does, consumer spending will come down, leaving a hole in economic growth. So hopes for a vigorous rebound rest on spendthrift consumers being as materialistic as ever. Now there's a strong reason to be hopeful.

Available at Amazon.com:

The Next Hundred Million: America in 2050

What Could Derail Economic Recovery | Rick Newman