The U.S. Treasury’s efforts to shore up troubled lending giants Fannie Mae and Freddie Mac are critical to market stability, and likely need to include about US$20 billion of capital, says economic research firm, Global Insight Inc.

“The recent re-intensification of pressures on the housing and mortgage markets has precipitated a twin crisis of both liquidity and capitalization for Fannie Mae and Freddie Mac,” Global Insight notes.

On Sunday several steps were announced to help ease these crises. First, the US Federal Reserve Board will now provide unlimited access to its discount window to deal with the liquidity crisis. “Access to the Fed’s discount rate facility is a maneuver that will effectively defuse the short-term liquidity crisis that has erupted in terms of the GSEs’ (government sponsored enterpriesesability to fund their operations,” it says. “The GSEs now have access to very low-cost borrowing from the Fed’s discount window, at 2.25%.”

Additionally, Treasury announced plans to infuse unspecified amounts of equity capital into the firms. Global Insight calls the prospective capital infusions, “a critical additional policy measure that is needed to ensure their viability as private entities, as the recent deterioration of the housing market, combined with further pressures on the financial system from rating downgrades and capital write-offs, has essentially foreclosed the ability of the GSEs to raise new capital.”

“The Treasury needs to announce a substantial capital infusion program quickly to defuse the capitalization crisis and reverse further speculative selling of Fannie Mae and Freddie Mac stock. This would probably need to be at least US$20 billion (perhaps in the form of preferred stock), phased in over perhaps several quarters,” it suggests.

Global Insight says that this crisis of liquidity and capitalization “must be defused swiftly and effectively, because failure to do so would risk a further meltdown of the housing and mortgage markets of proportions not seen since the Depression era.”

“This is not the time for policy makers to underestimate, once again, the systemic risks to the financial system and the huge collateral damage this would impose on the economy. Bold, creative, and aggressive financial policy action is needed—and it is needed now,” it concludes.