The Palin "gaffe": Fannie Mae, Freddie Mac bailouts "expensive"

All national politicians make gaffes, from the experienced (John McCain’s fumble on Colorado water rights) to the novice (Barack Obama’s long string this year).  HuffPo thought that they’d found a gaffe by Sarah Palin and hysterically trumpeted it as a disqualification.  But as LA Times real estate expert Peter Viles explains, it only counts as a gaffe if one thinks a government bailout costs nothing:

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. The takeover may result in a taxpayer bailout during reorganization.”

Economists and analysts pounced on the misstatement, which came before the government had spent funds bailing the two entities out, saying it demonstrated a lack of understanding about one of the key economic issues likely to face the next administration.

“You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do,” said Dean Baker, co-director of the Center for Economic and Policy Research. “These are huge institutions and they are absolutely central to our country’s mortgage debt. To not have a clue what they do doesn’t speak well for her, I’d say.”

First, they operate as private companies, but they’re not.  Both Freddie Mac and Fannie Mae have government backing for their operations — which puts taxpayers in the position of co-signer.  They have never been a completely private enterprise.  John McCain made this point two months ago when responding to the initial crisis that threatened to bankrupt the two lending giants, and said the time has come to eliminate both and allow the private sector to do their work, instead of these two quasi-governmental agencies.

Congress gave Treasury Secretary Henry Paulson a huge blank check to bail out Fannie and Freddie, as Peter Viles notes, and now Paulson has committed to the bailout.  That will in fact cost taxpayers hundreds of billions of dollars, as Palin said:

The Palin comment is well within the margin of error on the campaign trail. There is no “gaffe” here. Congress earlier this summer — in the housing bill that both John McCain and Barack Obama supported but didn’t bother to vote on — gave Treasury Secretary Henry M. Paulson Jr. a blank check* to invest in Fannie or Freddie. It OKd a big bailout. Perhaps in your book a blank check freshly signed by Congress is not “too expensive.” Perhaps you trust the government not to spend a blank check. Perhaps pigs have wings. Palin was right: The very existence of a blank check means that Fannie and Freddie are too expensive to taxpayers.

*In a comforting bedtime story that several members of Congress actually believed, Paulson said the blank check was so big and powerful (a bazooka of cash!) he would never have to use it. By the time Palin spoke, it was clear that Paulson’s attempt at “verbal intervention” had failed and that real taxpayer money will be spent to prop up Fannie and Freddie.  No one knows how much, but the Treasury has signed contracts to invest up to $100 billion in each company. Oh, and loan them money too. Oh, and buy their mortgage-backed securities. Do you really want to argue that she made a mistake by saying the two companies are “too big and too expensive to the taxpayers”?

Thanks to the government support for Fannie and Freddie, Treasury was on the hook to do something to rescue them in any case, with or without this bailout.  People had invested in their securities with the implicit understanding that they had government backing.  Congress merely made that explicit over the summer, and Paulson acted in a rational manner to keep securities markets from utter collapse.  The starting point for this was not last week’s bailout, but a failure to force Fannie and Freddie completely into the private sector and to encourage competition in that market.

I’m sure Palin will make a gaffe or two between now and Election Day, but this isn’t it — and every single dollar of those hundreds of billions of dollars we’ll spend on a Fannie and Freddie bailout will prove it.

Update: King Banaian, chair of economics at St. Cloud State University, also scoffs at the notion that this was a gaffe:

The dollars were committed many, many years ago, back in its 1960s when the government was put on the hook for this and later legislation which allowed Fan and Fred to take on investments that were never the intent of the original design. The argument being made is akin to saying your home only cost you dollars after you paid the mortgage, not when you signed for the loan.


Update II: HA reader Ryan notes a similarity between those who believe this to be a “gaffe” and Dick Durbin explaining how the Tomnibus bill really didn’t spend actual money: