The public announcement of the US government takeover of Fannie Mae and Freddie Mac this Saturday comes as no great surprise to those watching the precarious state of the credit markets. Following a period of deregulation of credit institutions during the past 8 years or more, with Sen. Phil Gramm passionately leading the charge as Chair of the Banking Committee, a series of imprudent lending and investment decisions has led these credit giants to the verge of collapse. Some of those decisions were caused by misplaced euphoria as the country was floating along on the housing bubble that has now burst. With the plunge in the housing market, the value of the mortgage based credit instruments held by these large financial institutions also plummeted. As their asset base fell, their ability to lend and the marketability of the assets they hold also declined. As a primary source for home mortgage and other consumer and business credit, the failure of Fannie Mae or Freddie Mac could seriously affect the ability of consumers to secure financing for typical purchases that drive the US economy. Thus, the pressure to take some form of action to stabilize these institutions in the face of a staggering economy became intense.
Why was it so important for the government to intervene? The answer to that question is also not complicated. The strength or weakness of the housing market depends upon the availability of credit and mortgage financing. Indeed, the ready availability of mortgage financing to borrowers who previously would not have been deemed qualified was a major factor inflating the housing bubble. The drive for deregulation opened the door for unwise, and in some cases unethical, lending practices. Those lending mistakes have led to record levels of foreclosure and tens of thousands now face loss of their homes. These companies hold or guarantee more than $5 Trillion in home loans, or about half the total in the US. Obviously, the failure of Fannie Mae and Freddie Mac would have a major negative impact on the US housing market and economy overall.
The current dilemma is not a debate over whether these institutions should exist, but rather what is to be done about the current economic crisis to stabilize the market and reduce the risk to taxpayers in the face of the necessary intervention. Since the problem will not be rectified by the end of this year, and any action needs to be based upon a longer term strategy, the positions of the current candidates for the White House are of interest.
Obama campaign has been critical of the deregulation and the indiscipline that led to the mortgage lending crisis. The Obama campaign has indicated a belief that some form of government intervention was necessary. His campaign has announced that it wants to study the details of the proposed bailout carefully to see whether it contains the requisite and appropriate elements for an effective immediate response and the foundation for a longer term remedy.
Saturday, the response from the McCain campaign through its Vice Presidential candidate regarding the Bush administration intervention on behalf of Fannie Mae and Freddie Mac was that: “The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help.” Sarah Palin said Fannie and Freddie “have gotten too big and too expensive to the taxpayers.”
The former response seems considered and rational, while the latter seems muddled and nearly incomprehensible. It appears to be the kind of response that a person who grasps neither the history of the situation nor the fundamental economic functioning of these companies or the credit market. For a person who is striving to dispel the idea that she is a backwoods and unsophisticated politician, Palin has chosen her words poorly. It is the management of the companies, not their size that presents the current predicament. The “cost” to the taxpayers would come essentially only in the need to rescue the companies from poor management. The role of government in their functioning is primarliy regulatory. Thus, it appears that Gov. Palin lacks a basic understanding of federal credit markets. It also appears that Palin is another example of the GOP style of leadership that prizes ideology over competence, slogans over substance.
The economic turmoil in the US and globally, and the complexity of factors that impact and will continue to influence credit markets, require much more than hollow slogans about "big government." The companies in question came into being in order to facilitate housing finance options and to make the purchase of housing available to average citizens on terms that were affordable. That strategy and the vehicles that made such financing available have fueled the American dream for millions of families for decades. Only by reemploying fiscal prudence and by restoring such institutions to financial health and vigor can the American people hope to regain confidence in the housing market and reverse the downward momentum we currently experience.
Only such inexperience and lack of comprehension would generate such a simplistic and economically nonsensical response. Further inquiry would probably reveal that Palin and her family have directly benefitted from the operation of these institutions. It is understandable that a neophyte who lacks exposure to the complexities of national finance, other than the specific quests for federal funding earmarks for local pet projects, would misunderstand the significance of the government intervention on such magnitude. The real question is whether the American people can risk entrusting the leadership of the country to someone so obviously unprepared to deal with such critical domestic issues.
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