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Monday, September 8, 2008

Anatomy of a "Gaffe"

According to the Huffington Post, Sarah Palin made her first gaffe today.

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 baling 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.

Now, whether or not this is a gaffe is ultimately determined by logic that is a second cousin of determining what the definition of is is. First of all, when pointing out someone else's gaffe, it is very important not to make one of your own. McClatchey is quick to point out that both Fannie and Freddie are private companies. Of course, that is not entirely true. They are in fact Government Sponsored Entities. They are not private companies but rather some sort of netherworld that makes them kind of private and kind of public, and that is part of their problem. Among the perks of being a GSE is that both get multi billion dollar credit lines from the Treasury at a rate no other company would get. So, in a sense, they are always working with the government's money, or as Fred Thompson so aptly described it...

Fannie and Fred were “government sponsored enterprises” which means heads they win, tails you lose. If they make money stockholders, creditors and Fannie and Freddie employees – some making millions annually – get the benefit. But now that mortgages have hit the skids, with mounting losses, the taxpayers potentially face trillions in exposure. This is because there is an “implicit” (read “actual”) government guarantee of Fannie and Freddie’s obligations and both are now too big to be allowed to fail. This is called the “bailout phase,” which will probably lead to a bigger bubble in the future.

Now, frankly, if there is a gaffe here it is Palin's suggestion that this phenomenon is new. It isn't.
As Palin herself points out they are huge however they have since their creation dominated the mortgage market. As such, they have always been in a position where they are too big too fail. If you want to call that a gaffe fine, but not one of consequence.

Another potential gaffe might be Palin's statement that the two have gotten too expensive for the tax payers. That's because they've never required the bailout they need now. Well, in that case whether or not this is actually a gaffe depends on your definition of is.

Of course, what is clear is that neither the folks at Huffington Post or the so called expert economists have any more clue about what both of these institutions do than they think that Sarah Palin does. Here is another quote from the article.

Added Andrew Jakabovics, an economic analysts 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."

Of course, it is patently ridiculous to say that the two have never had access to any credit line. They've had access to Treasury credit lines since their inception.

Finally, in my opinion, if any two politicians had a debate that lasted an hour or longer about the future of Fannie Mae, I would still be cataloguing the gaffes from that debate a week later. So, when partisans gasp in horror because a politician from the opposite party made what they consider a gaffe in explaining Fannie Mae and Freddie Mac, then I am amused. The reality is that Fannie Mae and Freddie Mac are terribly complicated. Their business structure and model is terribly complicated. Even mortgage professionals don't really understand either one of them. The reality is that all politicians are generally totally clueless about both entities.


Anonymous said...

Are Obama's top two advisers ex-heads of Fannie Mae?

mike volpe said...

You have to be more specific. The only person with ties to Fannie is Jim Johnson who was head of his VP vetting committee.

Anonymous said...

For years Fannie Mae and Freddie MAC have supported ACORN...and we all know how corrupt ACORN is. Just ask Obama.

mike volpe said...

Their support for ACORN should be a lot less concerning than the 200 million dollars they spent on lobbying Congress for themselves so that politicians on both sides would look the other way while they engaged in ever more reckless behavior which has ultimately landed us here.

The biggest part of their GSE problem is that it gets them way too close to the government. Since they both rely on the government so much, they have that much more motivation to lobby congress for special favors.

I don't feel like finding the link now but that 200 million dollar figure is from a article.