Right now, the federal government, at a huge cost to taxpayers of perhaps $100 billion, is bailing out the two government-backed mortgage giants, Fannie Mae and Freddie Mac — the so-called GSEs. “GSE” stands for Government-Sponsored Enterprise. But some reporters are financially-illiterate, because if you point out the obvious — that the GSEs are going to cost taxpayers billions — reporters will condescendingly “correct” what you said, by insisting that they are completely “private sector” entities (false) that have yet to cost taxpayers a dime (false). (Back in July, the predicted cost to taxpayers of a bailout was already over $25 billion, according to the Congressional Budget Office. The cost could be up to $300 billion. Moreover, the GSEs already “receive an estimated $10 billion a year in hidden taxpayer subsidies”).
CEI has been predicting for years that taxpayers would be on the hook if the GSEs weren’t reined in, and has long advocated reforms of their risky practices, but Fannie Mae paid off Congress (and bullied its critics) to prevent any reform. (Incredibly, Fannie’s executives, who engaged in Enron-style accounting fraud, continue to lecture their critics about fiscal responsibility, blaming all their problems on the banking officials and “free-market ideologues” who blew the whistle on them for gambling at taxpayer expense. I earlier wrote about this in the Washington Post.)
As John Berlau earlier noted, “Fannie and Freddie . . . 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 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. â€¦ It could be $200 billion tomorrow.’ (The transcript is here. Fred’s statement, in response 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 as â€˜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.’”
Taxpayers have subsidized the GSEs over the years, both directly (through subsidized lines of credit) and indirectly (by allowing the GSEs to borrow money at lower rates than they would otherwise have to pay, based on the implicit assumption by investors that the taxpayers would bail out the GSEs if they ever ran out of money). Now, the Congress, in authorizing a bailout of the GSEs, has essentially given the government a “blank check” at taxpayers’ expense.
Many reporters are so ideologically invested in depicting the mortgage crisis as the result of a lack of government involvement that they simply cannot accept the reality that Government-Sponsored Enterprises were at the root of the problem. Government meddling, along with federal regulatory pressure on lenders to promote “affordable housing” and “diversity,” helped erode traditional lending standards, resulting in more risky mortgage loans to irresponsible people with bad credit (as some longtime supporters of federal meddling now admit).