First off, I welcome President Barack Obama’s call to shutter mortgage giants (and giant pains in the public arse) Fannie Mae and Freddie Mac. Many conservatives and libertarians have been beating that drum since 2008 and before, back when Obama was voting present on regulation of Fannie/Freddie and taking more in donations from them than all but one lawmaker.
Now, it seems, we can work together on this project, as Obama pushed a Senate plan to close Fannie and Freddie during an economic address in Arizona:
But as home prices rise, we can’t just re-inflate a housing bubble. That’s the second thing I’m here to talk about today: laying a rock-solid foundation to make sure the kind of crisis we just went through never happens again.
That begins with winding down the companies known as Fannie Mae and Freddie Mac. For too long, these companies were allowed to make big profits buying mortgages, knowing that if their bets went bad, taxpayers would be left holding the bag. It was “heads we win, tails you lose.” And it was wrong.
The good news is that there’s a bipartisan group of Senators working to end Fannie and Freddie as we know them. I support these kinds of efforts, and today I want to lay out four core principles for what I believe this reform should look like.
First, private capital should take a bigger role in the mortgage market. I know that must sound confusing to the folks who call me a raging socialist every day. But just like the health care law that set clear rules for insurance companies to protect consumers and make it more affordable for millions to buy coverage on the private market, I believe that while our housing system must have a limited government role, private lending should be the backbone of the housing market, including community-based lenders who view their borrowers not as a number, but as a neighbor.
Second, no more leaving taxpayers on the hook for irresponsibility or bad decisions. We encourage the pursuit of profit – but the era of expecting a bailout after your pursuit of profit puts the whole country at risk is over.
A Senate bill co-sponsored by Sen. Bob Corker (R-Tenn.) and Sen. Mark Warner (D-Va.) “would end Fannie and Freddie as government-sponsored enterprises,” though a Rep. Jeb Hensarling companion bill in the House is more ambitious, cutting down government participation in the mortgage market to about 20 percent, according to an AEI evaluation.
I also welcome the inevitable change of heart from the press and fact-checkers who called this exact sentiment a “gaffe” when newly named vice presidential candidate Sarah Palin said it in 2008. Here’s Palin in Colorado Springs in September of 2008:
“John McCain has been calling for years to reform things and cut bureaucracy, even at the lending agencies that our government supports. The fact is Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.”
Fact-checkers, reporters, and critics preserved the ridiculous fiction that government-sponsored entities don’t cost taxpayers anything in order to lambaste the political newcomer.
The companies, however, 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.”
Added Andrew Jakabovics, an economic analyst for the progressive think tank, Center for American Progress: “It is somewhat nonsensical because up until yesterday there was sort of no public funding there. Even today they haven’t drawn down any of the credit line they have given to Treasury. ‘Gotten too big and too expensive’ are two separate things. The too big has been a conservative mantra for a while and there is something to be said of that in that they hold about half of the mortgage guarantees that are out there. And in the last year they have been responsible for roughly 80 percent out there. The ‘too expensive to tax payers,’ I don’t know where that comes from.”
“Too expensive to the taxpayers?”
They’re private entities.
Though they’re private entities ultimately backed up by the taxpayers.
But the only way Fannie and Freddie are “too expensive to the taxpayers” is if you’re talking about the bailout announced over the weekend.
Is that what she meant?
So, does “too expensive” mean that Palin opposes the bailout?
Or did she misstate how these entities function?
Yes, it was technically true that these government-sponsored entities were not run with taxpayer money, though they were started and chartered by Congress, but that was a polite fiction smashed by the $180 billion bailout the entities necessitated (and have since paid portions back). The reason they were allowed to get out of control was because they had understood backing from the United States government. They would never have otherwise been able to become as big and risky in their practices as they did, and everyone concedes that. Palin called them, quite accurately, “lending agencies that our government supports,” and suggested a plan of action less ambitious than the one Obama pitched today, five years later. One imagines she would have been called both dumb and extreme for saying exactly what Obama said today.
In writing about this concept, which everyone now agrees on in attempting to reform Fannie/Freddie, AEI explains:
Both bills would end Fannie and Freddie as government-sponsored enterprises. Both understand that the fundamental GSE model, which involves pretending to be simultaneously a private company and part of the government and results in privatized profits and socialized losses, is insidious and needs to be definitively terminated.
Hey, if only he’d known what Sarah Palin knew then.