The weeks leading up to a Presidential election have always been called the “silly season.” But the attacks from bloggers and the media on vice-presidential contender Sarah Palin’s supposed “gaffe” in her reaction to the takeover of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac takes the political season to a new level of ridiculousness.
On Saturday, September 6, when the takeover and billion-dollar taxpayer bailout announcement that would happen the next day was already being reported by the press as imminent, Palin remarked on the campaign stump about the GSEs: “They’ve gotten too big and too expensive to taxpayers. The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.”
Fairly straightforward statement, as the nearly $6 trillion in mortgages on their books does make them very “big” and the impending bailout announced the next day will likely make them very “expensive.” But according to Sam Stein on the liberal Huffington Post, in a piece that has gotten more than 3,000 comments and was cited by the New York Times and HBO’s “Real Time With Bill Maher”, this was “her first potentially major gaffe during her time on the national scene.”
Why is that? Well, according to Stein and others, because of the technical point that the Treasury hasn’t yet injected any government money, even though it is almost a forgone conclusion that it will. Also, some reporters and pundits writing on the Palin comments erroneously called Fannie and Freddie fully private companies and implied that they received no government support. In this case, there was a gaffe — not Palin’s, but their own.
The McClatchy Newspapers wire service, for instance, reported erroneously that the GSEs “operate as private companies.” In her New York Times piece covering the Huffington post criticisms, Leslie Wayne declared that Fannie and Freddie were not “government enterprises … as shareholders of the two publicly traded companies painfully know.”
Makes you wonder what part of “government-sponsored” in the phrase “government-sponsored enterprises” these reporters don’t understand! As Open Market readers know and as CEI has been pointing out for more than two decades, the GSEs, unlike normal pirvate companies, were created by Congress and enjoyed several privileges from the state. They had their own lines of credit with the Treasury Department (then “only” $2 billion, but which CEI President Fred Smith correctly pointed out in 2000 could be “very expandable” to as much as $200 billion), exemptions from state and local taxes, and were the only publicly traded companies to be exempt from regulation by the Securities and Exchange Commission. The Congressional Budget
Office has calculated that these privileges constituted an annual subsidy of more than $15 billion in 1999.
Also, under the law, the President has the privilege of nominating members to the GSE boards, providing plum jobs for political cronies.
In the third part of her interview with ABC’s Charles Gibson that aired Friday evening, Palin correctly referred to the GSEs as “quasigovernment” entities that need more oversight. And for that matter, even Democratic nominee Barack Obama has commendably recognized the problems with the GSEs hybrid public-private nature. He said on the campaign stump, “We can’t have a situation in which, during boom times, management and investors are soaking up huge profits, taking extraordinary risks, and thinking to themselves that if they get into trouble because of these risky investments that somehow the taxpayers are going to be there to bail them out.”
What about her critics’ technical point that it was wrong for her to characterize Fannie and Freddie as “expensive to the taxpayer” because Treasury hasn’t actually made a payment yet? Well, “Geniuses,” if we want to get technical about it, the GSEs have already cost taxpayers billions through the decades. By virtue of their tax exempions, they have cost state and local governments all the tax dollars other firms would be paying for the same profit-making activities. It’s political liberals, after all, who routinely refer to tax exemptions as “tax expenditures” the government has to pay. In fact, the liberal group Americans for Democratic Action decried in a 2007 resolution “this reduction in the District [of Columbia]’s tax base,” because “Congress has exempted various … quasi-governmental organizations, such as Fannie Mae, from taxation.”
It’s hard to tell if all this rage at the statement is really aimed at Palin or just at the fact that Fannie and Freddie’s implosion showed the role that government intervention, rather than a supposedly unfettered free market, played in the mortgage meltdown. As Hans Bader has noted in Open Market, many folks “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.” The GSEs are the big-government elephant in the room that just made a huge noise in the middle of deregulation being blamed for the mortgage mess.
Ironically, amid all the uproar, we still know very little about the long-term fixes for the GSEs that will be put in place by either the McCain-Palin or Obama-Biden administration. But we do know that the cause of serious GSE reform is not helped by pseudo-sophisticated economic ignoramuses such as the critics of Palin’s comments.