Sarah Palin explains Fannie and Freddie

Too "expensive to the taxpayers," says the governor. Does that mean she opposes the bailout?

Published September 8, 2008 9:17PM (EDT)

On Saturday, Gov. Sarah Palin summarized her views on the Fannie Mae/Freddie Mac mess:

"The fact is that 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."

On its face, the first sentence doesn't make much sense. For the last 40 years or so, Fannie Mae and Freddie Mac have been private entities, and haven't cost the taxpayer a dime. Since Palin was speaking in the past tense, an uncharitable interpretation would be that she doesn't know what she's talking about. She couldn't possibly be saying that she opposes the government bailout, could she?

A more friendly interpretation comes to us via ABC News' Jake Tapper:

A McCain aide e-mails on background that Fannie and Freddie "have $5 trillion in exposure. They either own or insure this much in loans, as such, they are too big a part of the economy to be allowed to fail. Their failure would pose a systemic risk to the economy, which is why treasury is stepping in, and has committed billions in taxpayers to keep them afloat. They are too big, and now, too expensive."

The magic words are "systemic risk." Because as we've seen over the past 18 months or so, whenever an important financial institution runs the risk of collapsing so badly that the entire financial system is threatened, it doesn't matter whether it is fully private -- like Bear Stearns, or pseudo-private -- like Fannie Mae and Freddie Mac. The government will come to the rescue. In such a scenario it doesn't matter if George Bush, Barack Obama, John McCain -- or Sarah Palin -- is president. The result will be the same -- a bailout.

And yes, it will be darn expensive, and taxpayers will foot the bill, and we'll all be very unhappy about it, and we will ask, is there a better way?

Judging by the second sentence of her quote -- "The McCain-Palin administration will make them smaller and smarter and more effective for homeowners who need help" -- the McCain-Palin answer is that once all the damage is fixed, Fannie and Freddie will be somehow downsized and yet made more effective. But here we have to ask the question, more effective at what?

The root of Fannie and Freddie's troubles rests in their inability to handle the immense havoc wrought on the the U.S. mortgage market by the housing bust. Let's recall that earlier this year Congress and the Treasury expanded Fannie and Freddie's responsibilities in an effort to stabilize the housing market. The two government-sponsored enterprises were given the right to handle "jumbo" mortgage loans that they'd previously been forbidden from offering and their capital requirements were lowered to give them more flexibility. It didn't work. The housing market did not stabilize.

Now the Bush administration has stepped in, acknowledging that what was once implicit must now be made explicit -- the government will not allow the mortgage market to completely melt down. Presumably, a McCain-Palin administration, faced with the same threat to the national welfare and global economy, would do the same thing. Regardless of whether Republicans or Democrats occupy the White House, taxpayers will be on the hook to pay for government attempts to keep the country from suffering through another Great Depression.

The Fannie and Freddie bailout is a side show. The real problem is figuring out how government should effectively exercise its oversight over the economy so as to prevent major catastrophes like the current one from blowing up in the first place. As I wrote earlier today, the one thing we can always count on is that markets will go awry and government will have to pick up the bill to pay for straightening things out.

Making Fannie and Freddie "smaller and smarter and more effective" is unlikely to do much to keep taxpayers safe from the real threat: irresponsible behavior in the financial markets by hooligans who have been allowed to run loose, unsupervised, for far too long. And most of the blame for that -- not all, but the majority -- is due the political party that John McCain and Sarah Palin belong to.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

MORE FROM Andrew Leonard

Related Topics ------------------------------------------

2008 Elections Globalization How The World Works Sarah Palin