Tuesday, September 09, 2008

Gaffe? No she gets it

Speaking of the Huffington Post they are reporting that Sarah Palin has made her first major gaffe on the campaign trail:

Gov. Sarah Palin made her first potentially major gaffe during her time on the national scene while discussing the developments of the perilous housing market this past weekend.

Speaking before voters in Colorado Springs, the Republican vice presidential nominee claimed that lending giants Fannie Mae and Freddie Mac had "gotten too big and too expensive to the taxpayers." The companies, as McClatchy reported, "aren't taxpayer funded but operate as private companies.

Calling Fannie Mae and Freddie Mac "private companies" is like calling the post office private. They were created by an act of congress and they were made exempt from the regulations which govern the conduct of other lending institutions, again by an act of congress. And worst of all, they have been working under an implicit guarantee of taxpayer money to bail them out if they ever got into trouble. As the Heritage Foundation puts it:

Washington has played a tidy little game with "FM2" for years. Congress created them to make more homes more affordable to more people. Part of their financial success lay in the implicit guarantee that if they ever got into financial trouble, the federal government would bail them out.

Freddie and Fannie spent millions and millions lobbying congress and making campaign contributions (mostly to Democrats) and in return have been shielded by mostly Democratic legislators, up to and including Senate filibusters to stop legislation which would have made them accountable to the same laws which govern other lenders.

OpenMarket.org, the blog of the Competitive Enterprise Institute is more explicit:

There are many words — and most them not nice — to describe the new government conservatorship and planned bailout of Fannie Mae and Freddie Mac. But “nationalization” and “end of the free market” are not accurately among them. One cliche is certainly true: a certain substance has hit the Fan (and Fred, for that matter). But so is another, there is really nothing new under the sun.

Whatever the problems of this scheme, and there are many that we wil be dissecting, nationalization isn’t among them. The state is simply being more explicit in backing entities that CEI has always characterized as creatures of big government.

Fannie and Freddie can’t really be nationalized, because they were never really private in the first place. Fannie was created as the government agency the Federal National Mortgage Association in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later.

But even though they had private shareholders, they always retained government privileges. The President still appointed some of their board members, they were exempt from state and local taxes, and, importantly, they each had a lines of credit with the Treasury. Though these lines were “only” $2 billion, CEI President Fred Smith presciently warned at a Congressional hearing back in 2000 that “as long as the pipeline is there, it is like it is very expandable. … It could be $200 billion tomorrow.” (The transcript is here. Fred’s statement, in repsonse to questioning by Rep. Carolyn Maloney, appears on page 193.)

Fred also testified about the inherent dangers of the privatization of profit and socialization of loss in the Fannie-Freddie model. He described the GSEs were “strange organizations, neither private sector fish nor political sector fowl” and said that “as a result, no one is quite sure how these entities should be evaluated or held accountable.” Now, at least temporarily, they are explicitly “political sector fowl [double entendre intended]” If noting else, at last some honesty!

In other words Governor Palin understands exactly what the situation is and is accurately stating the problem. These two companies have traded on their government backing to make huge profits (which they shared with their political protectors) doing things which would have gotten genuine private sector lenders put in jail and the result is that they are both about to collapse and take the rest of the economy down with them.

I hope that when McCain and Palin are in the White House they are prepared to do more than accurately state the problem. I hope they are ready to do what is necessary and break these bloated badly managed quasi-government institutions apart into truly private sector companies and let them sink or swim in the free market.

I also hope that they are smart enough to understand that the real genesis of this problem was the attempt to seek a legislative fix for what the left perceived as the unfairness of the free market. The entire reason for being of these monsters was the desire to see that people who could not qualify for home loans could get home loans. The fact that giving loans to people who stand a good chance of not being able to pay them back is a bad business practice was compensated for by the federal guarantees. The results could only be what we see happening today.

Za Za Algore and her minions are going to have to do better than this if they want to make Governor Palin look like she doesn't know what she is taking about.