Palin, on the Ongoing Financial Crisis

In response to the largest de facto nationalization in US history, we have this example of Governor Palin’s comprehension of this issue (ABC News):

Saturday in Colorado Springs, Colo., Alaska Gov. Sarah Palin said, “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.”


I can’t even start to dissect what’s wrong with this statement, so I will let the reader assess Palin’s understanding of the role of the GSEs in the financial system. From my perspective, I would have hoped to have more comprehension from a candidate at a time when the estimate of a resulting $300 billion taxpayer liability is viewed as plausible.


For some informed discussion, see Calculated Risk, as well as Nouriel Roubini.

[Update: 9/11/08, 7:22pm Pacific In response to Brian J‘s comment, I am posting a link to W. Scott Frame and Lawrence J. White, 2005, “Fussing and Fuming over Fannie and
Freddie: How Much Smoke, How Much
Fire?” Journal of Economic Perspectives 19(2), 159-184.
(non-gated version). For those who want facts, please read this article. The Journal of Economic Perspectives is an official publication of the American Economic Association. From the paper:

Fannie Mae and Freddie Mac participate in the secondary mortgage market:
Mortgage originators come to them with pools (bundles) of mortgages and either swap these assets for securities or sell them outright to one of the two companies.
Under Fannie Mae’s and Freddie Mac’s “swap programs,” an originator exchanges a mortgage pool for a mortgage-backed security that is issued and guaranteed by one of the two companies and that represents an interest in the same pool. Fannie Mae and Freddie Mac promise the security holders that the latter will receive timely
payment of interest and principal on the underlying mortgages, less an annual “guarantee fee” of about 20 basis points (0.20 percent) on the remaining principal. In essence, Fannie Mae and Freddie Mac are providing insurance to holders of mortgage-backed securities against default risk on the underlying mortgages and are thus bearing that risk themselves. This securitization activity illustrates one of
their two core businesses: mortgage credit guarantees.

The other core business of Fannie Mae and Freddie Mac is their investment
portfolios. These portfolios consist largely of mortgage-backed securities that they have purchased in the open market, as well as mortgages that they purchase from originators under their “cash programs.” Fannie Mae and Freddie Mac fund these assets largely by issuing debt, as the two companies are highly leveraged with total
equity that is less than 4 percent of total assets.

There are no government payments made to these two GSEs; of course, the government did not receive any share of the profits. There was a realization that these entities constituted a set of contingent liabilities. One set of estimates was $288 billion, very close to the $300 billion figure I cited.


(I was going to write about competitive depreciation in a Taylor rule framework, but this item called for immediate discussion.)

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157 thoughts on “Palin, on the Ongoing Financial Crisis

  1. mary

    She was right and Barack said the same thing:
    At a rally in Colorado Springs, Col., Republican vice presidential nominee Sarah Palin said, “They’ve 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.”
    Democratic nominee Barack Obama, speaking in Terre Haute, Ind., said, “These entities are so big and they’re so tied into the housing market that it is probably true that we have to take steps to make sure they don’t just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn’t take some steps.”

  2. TheCaptain

    It is obvious where Menzie stands on the political spectrum. What I don’t understand is why our government feels that it is every American’s God given right to own a home.

  3. algernon

    Admittedly, she sounds as superficial as Obama. But her statement is consistent with what is probably the optimal solution: Break them up into 10 or so smaller entities & privatize them. Privatize as in ‘if you fail, you fail’.

  4. James

    To the previous posts:
    You are missing the point and it’s in the parenthesis: (too expensive to the taxpayers) These entities did not cost the taxpayer a dime, until Sec. Paulson decided to socialize their losses and guarantee their $1.6 Trillion of debt. If Ms. Palin cannot understand that, she, and you for agreeing with her, have proved an old quote true; “it is better to be thought of as a fool, than to open your mouth and prove it to the world.”
    Socialize Wall St. Losses but NEVER Health Care!

  5. Menzie Chinn

    Babinich: That is an excellent question. I think there might be a role for explicit government intervention, where the costs are transparently explicit. Why there should be GSEs is a different matter.

    mary: The “talking point” might be correct, but the statement belies a complete lack of comprehension about how we arrived at this situation, let alone the institutional structure of US finance.

    algernon: Privating might be a good idea, but how you get there in the most efficacious manner requires a clear understanding of the issues. That’s why her comments were so disturbing.

  6. algernon

    You are probably right that she doesn’t have a deep understanding in this area.
    But you must admit that the few individuals who tried to correct this train wreck while there was still time were Republicans. These GSEs are the logical result of Progressives with good intentions: Corrupt organizations that are close to being Democratic slush fund/lobbying organizations that front as mortgage brokers…looted by the likes of Franklin Raines & similar Dems. $170,000,000 in lobbying expenses. It took 70 years but this result was predicted by many all along the way.
    Barney Frank should understands it. He helped it along. Compared to him, I prefer Palin’s instinctive reaction.

  7. Jana

    Her understanding is as deep and nuanced as Obama’s. You can’t possibly expect Presidential or Veep candidates to get up and talk about a subject as complicated and incomprehensible as the GSEs to the general public.
    I think you’re taking a cheap shot here.

  8. Ann Potter

    I agree with you Jana. I often think the answer I would like to hear from people like Mrs Palin or even Mr Obama (Who I really hope will win in November.)is something along the lines of “Well I am no expert in this area so I will have to get back to you with an answer to that question at a later date.” Then get the name and contact information for that person and answer the question asap. It would be so honest, so refreshing and it is too bad that those who expect candidates to be instant experts on all pertinent subjects would jump all over that statement knives out and ready. Of course in Palin’s case I can’t help but breath a sigh of relief as she says one more thing which I hope will add up to a loss for her ticket in November.

  9. Brian

    Really, you don’t see any distinction between those statements? The Obama statement (if thats the whole of it) merely says he thinks it was a good decision to intervene. The Palin statement suggests the problem is that they were ever allowed to get so big in the first place, which is like saying that the US economy is too big. These firms serve the housing market, they don’t dictate its size.
    Granted, neither statement demonstrates great command of the issue, but I see more meaning in Palin’s words.

  10. jg

    Get over it, Professor; based on today’s polls, get ready for four more years of the Republicans.
    And, that’s Vice President Palin to you, sir.

  11. Mojito

    Sarah Palin said, “The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. ”
    *snicker* what a laughable ignoramus.
    You would think someone on the prez ticket would at least bother to learn what Freddie/Fannie do, who owns them (not the taxpayers) and how this ‘conservatorship’ is actually putting the taxpayers on the hook for $5.4 trillion.
    This is how she’s ready to lead? Puh-leeze.

  12. George Smiley

    Algernon typed: “You are probably right that she doesn’t have a deep understanding in this area.”
    No. Palin’s remarks indicate that she has No. Understanding. Whatsoever., in this area. None. Nada. Zilch. Your remarks, Algernon, indicate precisely the same thing.

  13. Econ

    Am I getting crazy or Sarah Palin was implying that the GSEs HAVE BEEN too expensive to the taxpayers as if they were SOEs, say, 10 days ago?

  14. MLM

    “I wish people wouldnt say that Fannie and Freddie have been nationalized. I mean, its basically accurate, but it conveys the wrong impression.”
    http://krugman.blogs.nytimes.com/2008/09/08/deprivatization/
    When Palin implements the U.S. version of the Great Leap Forward, and you are thrust out of your comfy academic position and into making mooseburger patties, you will wish you had taken the time to get your terminology straight. Don’t say Krugman didn’t warn you.

  15. McCain's No Hero

    Well, it is not a cheap shot when a VP candidate refuses to have open conversations with the press. She has basically been reciting a variation of the same speech she gave on the Friday McBush announced her as his choice. This comment on the F/F bailout was the FIRST time she has gone off script and she reveals that she is ignorant about the most important financial institution in our nation’s current economic discourse (the mortgage industry). Sounds to me like she needs to spend some more time with the briefing books.
    I hope this cynical sop to the evangelicals crashes and burns. Whatever “independence” McCain ever had went down in flames with this choice. He is a hostage to his party’s extreme right-wingers. They can’t be allowed to win again if this nation is going to be worth living in for the next 50 yrs.

  16. Common Sense

    Entry level real estate agents have a better grasp of Fannie and Freddie than Sarah Palin showed. We’re setting the vice-presidential bar awfully low if “knows less than a real estate agent” defines her understanding of one of the most important industries in America.
    On the other hand, she’s probably a better shot than Cheney.

  17. One Salient Oversight

    Okay, English teacher time.
    Palin said
    “They’ve 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.”
    - Too big? yes.
    - Too expensive to taxpayers? No until they were Nationalised over the weekend. Palin gets that fact wrong.
    - Make them smaller and smarter? By doing what? Downsizing? Letting the market take over their function? She doesn’t say anything here of substance.
    - More effective for homeowners who need help. Freddie and Fannie guarantee half of America’s mortgages. Does she think that they exist only for “homeowners who need help”?
    Now onto Obama
    “These entities are so big and they’re so tied into the housing market that it is probably true that we have to take steps to make sure they don’t just collapse, because the housing market, which is already weakened, would be in even worse shape if we didn’t take some steps.”
    These entities are big – yes.
    Tied to the housing market – yes.
    Taking steps to make sure they don’t collapse – no hint here of understanding that GSEs are guaranteed by the government which means a bailout was the only option.
    (The housing market) is already weakened? Yep.
    Even worse shape if no steps were taken? Yep.
    In short, Obama didn’t say things I wished he’d say, and Palin said things I wish she didn’t say.
    Obama didn’t get anything wrong, he just didn’t say everything we wanted him to say.
    Palin got things wrong.
    Textual study over. Class dismissed.

  18. mike

    Menzie,
    Even though you don’t know where to begin, you really do need to spell it out for folks.
    You see, most understand as little as Sarah Palin, which makes your post look like a cheap political swipe, even though it isn’t.
    It’s understandable that Palin doesn’t really understand what’s going on. That she steps out with bold policy reccomendations in the midst of her ignorance is frightening. Obama may know little more than Palin, but I do appreciate the fact that he is taking time to learn about what is going on before he steps up with policy recommendations. To me, that contrast speaks volumes.
    Yet, despite these vast differences between Palin and Obama’s responses, people view them as the same.
    Hmmmmm.
    I think you would provide a great public service if you dissected the McCain/Palin OPED in the WSJ.

  19. Blissex

    What I don’t understand is why our government feels that it is every American’s God given right to own a home.
    There are plenty of statistics that show that home ownership/home mortgageship makes people vote to the right. Same as stock ownership, gun ownership, …
    Individual home ownership is economically inefficient and inflexible, costly for the taxpayers who subsidize it, but by all measures increases the percentage of Republican voters who elect people who pass huge corporate welfare bills for big business and its executives.

  20. FXKLM

    Everyone knew that, if the GSEs collapsed, the federal government would intervene. The cost to taxpayers was always there. Palin’s statement was perfectly reasonable.

  21. odograph

    On housing subsidies I am a pretty extreme libertarian (roll them all back, including your precious mortgage interest deduction). That said, I give Obama credit for using the word “entities” and the understanding that implies.
    Freddie and Fannie are bizarre entities and that is our problem.

  22. John

    Wow, there seems to be a bias against Realtors. They operate as “independent contractors”, they are not employees with benefits, vacations, sick pay, health insurance, pensions, or 401K’s. They help market and secure complicated assets for people who do not fully understand all the complexities of real estate. Realtors rely on others to help – mortage brokers, bankers, home inspectors, appraisers, etc. They try to live up to the Realtors Code of Ethics which by the way includes the Golden Rule. They are in a self winnowing field – no tenure. However, they are as likely as the general population to not know what Freddy does or how he does it, because they do not interact directly with him.

  23. Jim

    If I offer you an investment that returns 10% a year for 50 years and then loses 100% in year 51, would you say that is a good investment? The taxpayers didn’t have to pay anything for the GSEs for a long-time, until the GSEs collapsed. Their job was to stabilize the housing market; they failed. Their job was to make housing affordable; they failed.
    Palin is 100% right. If the GSEs were smaller, the cost to the taxpayer would be less, or perhaps even zero if the GSEs were broken in smaller companies and fully privatized.

  24. Walt French

    I’m interested that supposedly Treasury reassured the Chinese and others that the GSE bonds enjoyed the full support of the US Govt, official policy (those quaint things we call “laws”) notwithstanding.
    That reassurance allowed the US Govt to extend ITS hugely irresponsible borrowing without crowding out mortgage loans. Absent that reassurance, foreign bankers might well not have bought the loans, mortgage rates would not have been set artificially low, banks would have born the actual credit risk of the rotten loans they wrote and treasuries might have gone up a few dozen bps to compensate foreign owners for what everybody knew was a falling dollar.
    And now I wonder, with the GSE bonds even more perfectly backed than before (tho, one could argue, still exposed to govt repudiation), how can private MBS compete? They will only be able to do so for loans that the GSEs won’t take, and Paulson has called for expansion of the GSE portfolios. I.e., we will NOT have anything resembling reform of the mortgage industry until some reversal of this temporary bailout occurs, no?

  25. mh497

    Her statement isn’t that far from the truth. It is simplistic.
    Let’s face it: Obama made the political miscalculation of the century by picking an old Washington hack as his running mate, instead of Hillary Clinton, completely undermining his central message of “Change”. McCain saw the opportunity and ran with it.
    People can smell fear in the air on the Democratic side, and the polls are starting to show it. Obama now has a very serious problem on his hands.
    Slinging mud at Sarah Palin? The danger there is that the more she fends off, the more capable she looks.

  26. BN

    I don’t think Palin’s comments are as egregious as some are making them out to be but they are simplistic and show she doesn’t have a good grasp of the issue.
    Obama’s remark was not even close to what Palin said. It was much more nuanced and shows that he at least has some idea what is going on.
    As with anybody who has been in Washington for any length of time Biden certainly has his share of problems and entrenched interests but overall he has a very good grasp of the issues. He will be an asset should Obama get elected. Clinton and Biden are equal as far as intelligence and on understanding most issues and Obama has a better rapport with Biden therefore it was a good pick.

  27. Keith

    I assume you are all talking policy and economics for your own entertainment because it has nothing to do with picking a president.
    Doesn’t anyone get the point yet? Americans are very stupid, very selfish, and very insecure. They can be lied to any number of times and still think it’s different this time. They want a president/vp who is just as dumb as they are, so there is no risk of being talked down to. That is why Bush was elected twice. That is why Palin is so popular. They both have the same level of understanding of the world as your typical American who perfectly mimics what he hears on the radio or what he sees on the Pre-Game show. That is why shooting a gun or swinging an ax are so important. Because the monkey in the recliner sees that and starts to hoot and jump up and down because these things are familiar, and so he trusts them.

  28. Suzan Campbell

    You have to wonder if the someone is using a Google News search to flag Palin articles – and then planting comments. Several of the first few comments in this thread just don’t sound like the usual commenters on this site . . .

  29. Broxburnboy

    It must be pointed out that only the losses (present and future) have been nationalized. The bondholders who are the beneficial owners of F&F have their returns guaranteed. Socialism for the rich… private enterprise for the poor.
    These economic policies combined with the emphasis of national security, a preemptive, aggressive foreign policy and justified by a mythology of divine predetermination, looks a lot like the National Socialism of Germany mid 1930′s.

  30. Selene

    Menzie,
    I agree with Mike @ 3:07 — you’d be doing a public service to disseminate some analysis in a broader forum. I’m disappointed that quite a few people who care about economics enough to come to something called “Econobrowser” don’t seem to understand why Palin’s remarks on this topic were appalling.
    It’s one thing to be ignorant, and quite another to either not know or not care that you are ignorant and bang out nonsense anyway, as she did.

  31. Buzzcut

    Who had a ex-Fannie exec on his VP selection comittee?
    If Obama knows more about the issue, it’s because he had the perpetraitors of the fraud on his team!
    What was the bottom line cause of this mess? Menzie loves the deregulation meme, but I think it had more to do with the home ownership fetish than anyting else.
    These entites were all about getting more and more people into homes, because of some vauge notion that homeownership makes people better citizens.
    Maybe that was true when it was middle class white people getting loans with twenty percent down, but when it’s poor minorities getting 100%, or even 120% equity loans, no money down, no need to prove income, well, they’re not really homeowners, are they? They’re renters of a different fashion, and there should be no expectation as to they being good citizens.
    And, of course, the evidence is that they were NOT good citizens. There was a lot of fraud out there being perpetraited by the borrowers themselves (not to mention brokers and others in the industry).
    And what about the whole “walk away” phenomenon. Is that being a good citizen? Does that improve neighborhoods?
    Getting the government out of the business of increasing homeownership doesn’t just mean re-privatizing Freddie and Fannie, or disolving the FHA. How about getting rid of the home mortgage interest tax deduction? How about phasing it out? Let’s say get rid of it over $250k in mortgage? How about eliminating it for second homes?

  32. Richard

    There’s just way too little to go by in Palin’s comments. And same for Obama’s statement. Are they running to be CEO of those entities? Get over it and stop the nitpicking; the problem with her statement hinges on semantics. Palin may have said that Fannie and Freddie “have gotten” too big and expensive for taxpayers. That’s not the same as saying that taxpayers have already already incurred the cost. It is merely an observation that it is true that the potential liability is enormous. And it is also true that there is a decent probability of the recent take over being quite expensive.

  33. Menzie Chinn

    algernon: I don’t actually know that you are right that the most adamant privatizers of the GSEs were Republicans; might be true, but haven’t tabulated. But I do know that the most zealous deregulators in the Administration (Treasury, etc.) were political appointees under the Republican Bush Administration, and it is deregulation (or failure to use existing authority), that is a good part of the blame for our current situation with respect to subprime, Alt-A, etc. (see [1]. In any event, I am sure there is more than enough blame to go around.

    Jana and Ann Potter: There is a great difference in terms of factual errors. The sheer misunderstanding makes me fear that even if she might want to get to an end-goal that is similar to mine, she might undertake a path that results in an even bigger blow-up; after all, this is just the beginning of the process. Or does she want immediate privatization…

    FXKLM: If that statement was perfectly reasonable to you, well, I can see in some deep sense it is. But the fact that she skipped over a lot of steps involving contingent liabilities, moral hazard, makes me wonder what sort of policies she would prescribe.

    Jim: If the GSE’s were smaller, the outlay would be smaller? Hmm, farmers have been getting billions of subsidies, and there are many of them (granted most go to ever bigger farms, but still…). And, I think there were plenty of Savings and Loans that were bailed out in the something called the S&L crisis of the 1980′s and 1990′s. So, I’m not sure about the empirical basis for your remarks. Could be true, but case not yet proven.

    MLM: I don’t have any problem with “deprivatization” as a description; it’s more apt. But I have a catchier phrase with “largest de facto nationalization”.

  34. Charles

    Good grief!
    People applying for the top jobs in the nation, jobs where their decisions will affect our livelihoods– even our very lives– are NO LONGER EXPECTED TO UNDERSTAND THE GOVERNMENT THEY WANT TO RUN??
    Ann, Mary, Richard and many others… this is shameful. Fannie Mae and Freddie Mac were private companies. They went wrong not because of size but because they were poorly managed. They were badly run by people who were poorly qualified for leadership positions.
    This country is dissolving in a wave of corruption and incompetence. Those who act to excuse incompetence will deserve every bad thing that flows from their enabling.

  35. c thomson

    Wow! This is a good one! Snivels and rants! Just like the letters page of the NYT today. Fun!
    Not much to do with economic analysis of course but perhaps Professor Chinn is thinking of a future political slot? So many promising young Democrat economists that it is hard to rise about the throng?
    I think we should be told…

  36. diz

    I think Palin’s statement is basically true, but probably by accident.
    Anyone trying to argue the implicit guarantee most people felt existed — which is now no longer implicit but explicit — wasn’t costing the taxpayers money has a fairly weak understanding of basic finance.
    One does not take on contingent liabilities without expected cost.
    This reminds me a but of the people who claim the Chrysler loan guarantee didn’t cost the taxpayers money. But of course it did. They taxpayers took on a liability worth huge amounts of money without compensation. If a private entity had provided that loan guarantee, it would have demanded payment of the risk it took. The taxpayers did not get fair compensation for taking on the massive liability. Who would seriously argue that is not a cost?
    In the case of Chrysler, the government did not have to make good on the expensive guarantee it provided for free. It gave away a free fire insurance policy, but the house didn’t burn down. In the case of FNMA and FHLMC, the house did burn down.
    I don’t see how anyone can seriously it wasn’t “costing the taxpayers” all the years this now very real liability was being accrued.

  37. Tom

    “The Palin statement suggests the problem is that they were ever allowed to get so big in the first place, which is like saying that the US economy is too big.”
    How far left do you have to be to say THAT.

  38. Markel

    Maybe that was true when it was middle class white people getting loans with twenty percent down, but when it’s poor minorities getting 100%, or even 120% equity loans, no money down, no need to prove income, well, they’re not really homeowners, are they?
    Do you have even a passing familiarity with what “conforming loans” means?
    Perhaps your white hood interferes with your ability to read.
    It might also behoove someone to review the market share statistics post-2000, and point out the GSE’s “got so big” only when the private market collapsed after the credit crunch.

  39. RealThink

    Beyond Palin’s comments, there is a much more important side of the Fannie & Freddie issue, which can be appreciated only when viewed from the perspective of the physical limits to growth (or “from the top of Hubbert’s Peak”). If you are aware of Peak Oil and Peak Everything, and that Easter Island’s society could have avoided catastrophic collapse if they had stopped building moais in time, it is clear that the housing correction is not the biggest risk, but the biggest HOPE for the US. Because when house prices fall below construction cost, residential construction grinds to a halt. Which, from a Hubberts Peak-aware perspective, is exactly what the doctor orders. Because construction of more suburban and exurban McMansions is just digging further in the already deep hole most of the US population is in, as inevitably higher fuel prices will turn those homes into traps for their occupants.
    So, while the “Preferred Stock Purchase Agreements” part of the plan is completely justified and was necessary for the very reason stated by Paulson: ensure the GSEs can fulfill their EXISTING debt “held by central banks and investors throughout the United States and the world”, it is the “GSE MBS purchase by the Treasury” part of the plan which is most unwise in the light of the physical limits to growth. Sure enough, that part, as Paulson says, would be necessary “”to further support the availability of mortgage financing for millions of Americans, (…because…) During this ongoing housing correction, the GSE portfolios have been constrained, both by their own capital situation and by regulatory efforts to address systemic risk. As the GSEs have grappled with their difficulties, we’ve seen mortgage rate spreads to Treasuries widen, making mortgages less affordable for homebuyers.” What Paulson (and practically the whole political/economic/financial establishment) cannot see is that a decrease in the availability of mortgage financing is a GOOD thing for Americans, just as a decrease in the availability of drug financing is a good thing for a junkie.
    Again, lack of mortgage credit -> house prices fall further -> eventually they fall below construction cost -> residential construction grinds to a halt, which, from the way and places houses are being built today, is a GOOD outcome.
    And if the US Treasury does not know what to do with the pile of cash it is sitting on (?), here are a few areas where it could be used instead:
    - Wind farm construction
    - Upgrading the electric grid to handle the above item
    - Electrifying the US freight railroads and replacing the double and triple tracks taken up in recent decades
    - Building electrified urban rail

  40. Ed

    It is disappointing our (potential) leaders do not really utilize informed decision making. We expect our doctors, lawyers, teachers, scientists etc. to be informed decision makers. I guess we don’t hold our leaders to the same level of expectations when it comes to good decisions.

  41. stefan

    I don’t understand why Palin’s statement is so awful — the too big and too expensive view is pretty common and arguable. So the costs of the GSEs come from the fact that they have a implicit put option to the US treasury, one that didn’t get close to or into the money until recently. But issuing implicit out of the money put options isn’t a free lunch. What I am missing here?

  42. Anonymous

    Menzie wrote:
    algernon: Privating might be a good idea, but how you get there in the most efficacious manner requires a clear understanding of the issues. That’s why her comments were so disturbing.
    Menzie,
    You are absolutely correct as is algernon. Unless we know how we got here we will not be able to resolve the situation without a worse disaster.
    From its inception in the New Deal Fannie has been a potential time bomb. The only reason it has taken so long to explode is because congress
    restricted its involvement in the economy.
    But the dam broke when the Democrats realized that Fannie could become one of their most profitable slush funds. Bill Clinton placed Fraklin Delano Raines (ironic name) in charge and essentially stopped issuing financial statements. Fannie began to gorge itself on loans and Raines and others pocketed nearly $1 billion dollars. Because of the lack of accounting records it is difficult to know who else gained but we do know that a lot of Fannie money went to Capital Hill to “lobby” for continued lax oversight.
    Menzie, I believe we should have a thread on what needs to be done to correct the disaster of Freddie and Fannie. Now that they hold over 50% of all the mortgages in the US it should be obvious that their immediate dissolution would be disaster, but the Bush administration of allowing them to continue with business as usual will only compound the pain. There will be pain because of Fannie her little brother Freddie but the only real solution is their slow death.

  43. W.C. Varones

    Menses,
    Everything Palin said is exactly right. Fannie & Freddie, in fact, have gotten too big and too expensive for the taxpayers. And a smaller, smarter, Fannie & Freddie not run by corrupt Democratic politicians might be more effective in targeting assistance to worthy borrowers rather than flippers and speculators.

  44. brooklyn91941

    Its scary to me that politicians make stupid statements and everybody jumps on every nuance. However Fannie and Freddie were private companies and had call on the traesury beyond the implied guarantee.
    The problem with Fannie and Freddie is too much leverage. Thats the basic problems with the banks and the brokers ( Bears balance sheet levered 30 times) Fannie and Freddie 40 to 50 times. You dont need much of a loss to become insolvent at these leverage levels.
    The financial services industry need oversight and limits on their balbance sheets.
    The country is in trouble financially because of unwieldy deficits and a consumer that lives way beyond their means. Bad times are coming, you cant run a government on a credit card, especially when your enemies are lending you the money.

  45. Menzie Chinn

    c thomson: I will not insult you by inquiring whether your employment determines what you write in your comments. But you can see what organizations and entities I am “guilty by association with” online, here (pages 1-2). I have not been approached by any campaign, nor have I inquired with any campaign. To my knowledge, blogging is not the way in which economists make it into an Administration. If you have superior information in this regard, please share it with us all.

  46. anon

    I see no problem with the statement.
    I interpreted it as a somewhat clumsy, short-handed way of saying they needed to be broken up and privatized after the major dust settles.
    That’s been proposed by others as well.

  47. Buzzcut

    It might also behoove someone to review the market share statistics post-2000, and point out the GSE’s “got so big” only when the private market collapsed after the credit crunch.
    Which was caused by what?
    You can’t say that Fannie/ Freddie’s collapse didn’t have anything to do with the froth that was the mortgage business. Menzie doesn’t even agree with that, as he keeps citing deregulation as the root cause of the collapse.

  48. Buzzcut

    To my knowledge, blogging is not the way in which economists make it into an Administration.
    First time for everything! Stranger things have happened.
    I would think that a blogger has too much… unscripted verbage… to ever get a place in any administration for long. You might get nominated, but the powers against you would dig up something said at your blog (probably a comment!) to use against you.

  49. brooklyn91941

    buzzcut dont go who gets campaign contributions, because thats a cess pool that has to be drained on both sides.
    Look who was put in charge of Fannie. Herb Allison. John McCains finance chair in the primaries And Mr Moffet at Freddie comes from the Carlyle group Bush family private equity firm.
    All that happened so far is a change in mgt.

  50. Peter

    What I don’t understand is why our government feels that it is every American’s God given right to own a home.
    because otherwise how can the People keep eating
    the mythology that they live in the best country
    on the planet…
    borrow->spend->grow is hitting the wall and those
    in power to do something about it have decided to
    put all their efforts into moving the wall just
    a bit further away so they get time to ride out
    of Dodge with the spoils.

  51. Buzzcut

    Opensecrets.org, of course. What kind of a question is that, Menzie? ;)
    Let’s do the top 10, shall we?
    Name
    Office
    Party/State
    Total
    1. Dodd, Christopher J
    S
    D-CT
    $133,900
    2. Kerry, John
    S
    D-MA
    $111,000
    3. Obama, Barack
    S
    D-IL
    $105,849
    4. Clinton, Hillary
    S
    D-NY
    $75,550
    5. Kanjorski, Paul E
    H
    D-PA
    $65,500
    6. Bennett, Robert F
    S
    R-UT
    $61,499
    7. Johnson, Tim
    S
    D-SD
    $61,000
    8. Conrad, Kent
    S
    D-ND
    $58,991
    9. Davis, Tom
    H
    R-VA
    $55,499
    10. Bond, Christopher S ‘Kit’
    S
    R-MO
    $55,400

  52. gaius marius

    politics is politics, folks — but i’ve been a republican for most of my life, and i can admit that palin clearly does not understand how the GSEs work. a lot of politicians don’t, particularly on the state level. is that really so hard to admit, or does partisan allegiance now necessarily mean outrageous denial of truth?
    the more interesting question: how on earth can FNM/FRE be privatized? it’s not a matter of simpleminded downsizing. their entire business model is predicated on borrowing at near-sovereign rates. as fully privatized entities, they will be no more efficient at securitizing mortgages than goldman sachs — indeed would probably be disadvantaged.
    i can easily see why FMN/FRE would and could exist to serve government policy goals, even if i don’t agree with those goals. the GSEs were remarkably good at their mission (until they were perverted into government hedge funds by the financial predation of recent administrations).
    what i cannot see is why they should or how they could be privatized. the idea strikes me as part of a partisan farrago. privatization is simply not the answer for all ills — unless you suffer from a randian pathology, of course, but then why should anyone care.

  53. CL- Oregon Girl

    The reason people are jumping all over this statement is that we know very little about Ms. Palin. She keeps delivering the same speech replete with falsehoods about the being against the Bridge to Nowhere. So given that track record, everything she says will be scrutinized.
    Yes we do want our leaders to know something about the government they are trying to run. So we want to know more.
    And If people criticize her statements, so what? She can take care of herself. If she can’t, she is in the wrong business.

  54. erewhon

    Some of your commenters are so ideological that they can’t understand what they read. Yes, you are right, Menzie. Palin’s comment was dumb; Obama’s was evasive, but not dumb. No politician except maybe Ron Paul wants the public to understand this debt and credit problem. If we do, we will fire all of Congress and the executive branch. Actually, FNM/FRE executives have been using their quasi-governmental status to cook the books and rip off the public for some time- for this they get rewarded with millions of dollars. Tell me that we don’t have government of the people by Wall Street and the big corporations!
    Now, Paulson and Bernanke have said, gee we can’t let those foreign bondholders get too upset, we need their continuing financial support, so we must step in and secure the price of preferred shares in the GSEs. That will reduce the cost of their borrowing and therefore someone taking out a mortgage in October will pay less. Realtors will do a bit better. However, we are adding to the deficit- at some point our deficit will get to the point where our Asian masters let us crash as we did Argentina. Is America built on low mortgage rates and massive military spending? Seem like that to me, and it seems unsustainable. What will our government do when/if Lehman Bros and/or Merrill Lynch stumble?

  55. DickF

    brooklyn91941 wrote:
    Look who was put in charge of Fannie. Herb Allison. John McCains finance chair in the primaries And Mr Moffet at Freddie comes from the Carlyle group Bush family private equity firm.
    No brooklyn, it is not who is in charge. It is who stole. Franklin Raines was the crook who make Fannie into the monster it is. “In 2006, the OFHEO [Office of Federal Housing Enterprise Oversight] announced a suit against Raines in order to recover some or all of the $50 million in payments made to Raines based on the overstated earnings initially estimated to be $9 billion but have been announced as 6.3 billion.
    “…Raines also agreed to donate the proceeds from the sale of $1.8 million of his Fannie stock and to give up stock options. The stock options however have no value. Raines also gave up an estimated $5.3 million of “other benefits” said to be related to his pension and foregone bonuses. [Please note that he took nothing from his own pocket]
    In a settlement with OFHEO and the Securities and Exchange Commission, Fannie paid a record $400 million civil fine.
    In June 2008 Wall Street Journal reported that Franklin Raines was one of several politicians who received below market rates loans at Countrywide Financial because the corporation considered the officeholders “FOA’s”–”Friends of Angelo” (Countrywide Chief Executive Angelo Mozilo). He received loans for over $3 million while CEO of Fannie Mae.
    Imagine any CEO receiving this kind of hand out from its major customer. Can you say conflict of interest on steriods.
    ENRON brough us SARB-OX while this king of fraud at Fannie Mae brings a yawn. Give me a break!

  56. donna

    Palin likes living off the government. Alaska gets more pork per capita than any other state. It is run on oil profits and federal funding. Anyone saying this woman is somehow a fiscal reformer is a freaking idiot. She charged the state for travel expenses for over 300 days when she was living AT HOME, for crisakes.

  57. BM

    After reading most of these responses I can see that the majority of you are in the same boat with the senator and the govenor. You no very little about the GSEs. Do you think that the nominees should know everything about the housing and mortgage markets? Not to mention the auto industry, the manufactiring industry, the finance industry, etc.

  58. Richard

    Charles at 8:06: I did not say that politicians should not be expected to understand the government they want to run. I expect elected officials to be knowledgeable, highly competent and with scruples, but I do not expect them to be expert in all that the government does, including GSEs. No one would fit that description. Besides, we’re talking about GSEs, which are a particular sort of private enterprise, now nationalized. I do expect politicans to rely on experts in the field (Menzie?) and then to exercise prudent judgment. No politician running for Prez or VP is going to fill in details to extent Menzie would have liked, especially in a campaign speech. No one excusing incompetence. My point is not enough in Palin’s speech to make a fair judgment. Given the opportunity to enlighten with a post, Menzie
    “can’t even start to dissect what’s wrong with this statement.” Too bad. I think people are either reading too much into or misconstruing a pretty simple statement.
    Further, I did not suggest that Fannie went wrong because of its size. Size does, however, have everything to do with the potential liability, which I believe was Palin’s point. That’s axiomatic and hardly shows a lack of understanding. Yes, these institutions were badly run by people who were poorly qualified for their positions. That’s because these were (despite protests to the contrary) closely aligned to politics and political patronage. The last thing we need is more of the same.

  59. mp

    This thread is a live demonstration of why the US is going to blast a massive crater into the global financial landscape.
    I hope y’all are around to experience it when it happens.
    It will be glorious.

  60. Anonymous

    From the IHT 7/22/2008-
    “The proposed government rescue of the nation’s two mortgage finance giants should appear on the federal budget as a $25 billion expense, the independent Congressional Budget Office said on Tuesday, but officials conceded that there was no way to really know what, if anything, a bailout might cost taxpayers.
    The budget office said the chances were better than even that a rescue would not be needed before the end of 2009 and would not cost any money. But the office also said there was a 5 percent chance that the mortgage giants, Fannie Mae and Freddie Mac, could lose $100 billion.”
    Looks like people knew they were expensive back then and even further back warnings about having to bail the agencies out were not unusual.
    Maybe SP didn’t use elegant language about moral hazard, but she got the point accross.

  61. David Rogde

    Breaking these two GSEs into smaller entities proposes that they would be more effective, that the market would regulate all their excesses, and they’d still attract the necessary investment. Any body believe that?
    So there wasn’t a regulation problem at the root of this burst bubble, there was a size of enterprise problem? Anybody believe that?

  62. Broxburnboy

    Most contributors here seem to be trying to blame either one party or the other for the credit meltdown. Republicans used to believe in balancing the budget by cutting spending to match tax revenues. Now this “Republican” administration is the biggest spending machine in history. Both parties seem to support continuing spending on the fiscal black hole that is the Iraq war.
    The fact of the matter is that the incumbents from both parties will win in November, they have the financial support and have gerrymandered their own districts to ensure that outcome. There will be no meaningful change.. the deficit spending will not stop, private interests will be “rescued” for the “good” of the country for they are the same interests that sponsor the incumbents.
    American foreign policy is made in Saudi Arabia and Israel, the chief sponsors of the current regime. Bush and Palin’s ideology is tailormade to support these interests, and the American voter, sadly, will acquiesce and find solace in the certainty that he is doing God’s will as the country marches to a monetary Armageddon. Let’s hope that the final reckoning it is only an economic one.

  63. esb

    Equity markets, freed from Treasury pressure on Tier 1 proprietary trading desks to “behave responsibly” yesterday, rendered their verdicts on Paulson’s most recent “save the world weekend” plan.
    The verdict is more than a thumbs down,
    more like a FU.

  64. esb

    Incidentally, LEH is gone,
    so next weekend will be a Bernanke “save the world weekend.”
    In October, these two con men (BB and HP) will need to come up with a ploy to save GM/GMAC.
    May I suggest to these two command economy lovers an OFAEO* to manage the “investments” they will need to make (after obtaining Congressional authority, of course)?
    With so many balls in the air, there is no time to craft a “second stimulus package.”
    *Office of Federal Automotive Enterprise Oversight

  65. foo

    It’s hard to believe commenters here DON’T expect the people vying to be their leader, to be well versed on the single most critical issue facing the US and world. Wow.

  66. Jim Glass

    Arnold Kling, who use to work at Fannie and so presumably knows something about it, disagrees with you. He has no problem with Palin’s comment and says more valid criticism belongs elsewhere.
    (With more evidence on the point from the WSJ and Mankiw.)
    I mean, when one of the key drivers of this mess is still sitting in the driver’s seat and even today insisting he is going to keep driving the same course (as “Mr. Good luck on that!”), shouldn’t he really deserve rather more personal criticism than Palin?
    (BTW, as VP would she be expected to have any more responsibility for the GSEs than Cheney or Gore did?)

  67. DickF

    One very interesting thing about this takeover of Freddie and Fannie is that, with changes inside China, this makes the US the most socialist country in the world.

  68. Charles

    Buzzcut, I am shocked to see you join in peddling falsehoods about who the recipients of Fannie and Freddie donations are. According to Open Secrets, the top recipients in 2008 of FNM are Lamar Alexander, Saxby Chambliss, Sherrod Brown, John Cornyn, Melissa Bean, Roy Blunt, Rahm Emmanuel, Randy Neugebauer, and Nancy Pelosi with $10,000 apiece– 5 Republicans and 4 Democrats. Freddie Mac’s top recipient is Lamar Alexander. Tied for second place are John Boehner and Harry Reid.
    Calling FNM and FRE a Democratic slush fund, as some on this board have done, is a d–ned lie. Carelessness toward the truth–as nicely illustrated by the defense of Palin’s ignorance– is the main reason why the Republican party deserves to lose.

  69. Charles

    Richard states that “I expect elected officials to be knowledgeable, highly competent and with scruples, but I do not expect them to be expert in all that the government does, including GSEs.”
    You’re in no danger of having your expectations for a politician met.
    Palin has lied and continues to lie about earmarks, notably for the Bridge to Nowhere. She is a one-woman pork farm. She is one of the most effortless liars I have seen in American politics, putting out great big whoppers that only low information voters would swallow.
    Palin has been found billing the state per diem for living at home! She’s accused of firing the Public Safety director because he wouldn’t retaliate against her brother-in-law. She ran the debt in her small town up by about $3,000 for every man, woman, and child in order to build a sports stadium that she promised would pay for itself (it hasn’t).
    I could go on at length, but in summary: she’s so crooked that she makes Jack Abramoff look like a law abiding citizen. She’s not competent. Instead of speaking about things she does know about and referring other questions to her running mate, she knows it all.
    I am disgusted by those who make excuses for incompetence. I’d call Palin an affirmative action hire, but that would be an insult to those who have benefited from affirmative action. They actually have to know something.

  70. colonelmoore

    I had no problem with a statement that was made on the trail and doesn’t contradict anything that I know.
    Too big? Absolutely.
    Too expensive to the taxpayers? Not yet but soon.
    Make them smaller? Obviously we don’t want to start selling off their assets when the housing market is crashing. But she didn’t say that she would make them smaller starting Jan. 21st. But her statement was not inconsistent with Paulson’s proposal to sell off 10% of the the retained portfolios starting in 2010.
    ,,, and smarter? The devil is in the details on that one, but I suspect that the new management is going to be smarter than old management. No wild claim here.
    ,,, and more effective for homeowners who need help?
    If the GSEs are not sold off in chunks as some have proposed, then they will survive in some form. It wouldn’t be hard to improve on the “help” that they gave homeowners considering that apparently most of the implicit subsidy went into shareholder pockets.
    I think that economists blogging about political events have every right to do so, but I am not that impressed with Menzie’s commments, because I think that they made a mountain out of a molehill and then basically encouraged a partisan fistfight. Political discussions often fail to promote beneficial change because they are based on too little information. This is a classic example.

  71. Menzie Chinn

    colonelmoore: If you think making factual misstatements is a molehill in issues involving potentially $300 billion of taxpayer liability, that’s certainly your perogative.

  72. colonelmoore

    Thank you for replying.
    I think we disagree on whether she made a factual misstatement. I assume in the absence of detail in your original post (and please feel free to clarify) that the factual misstakement is that the GSEs have already cost us money. But that’s not what she said. All she said is that they have gotten too big and too espensive for the taxpayers.
    It’s true that they are not at present a taxpayer expense. But no one doubts that the bill to the taxpayers will come due.
    I think that the average person, if you explained to them the term “too expensive” in this context would heartily agree with her. I also think that they would find nitpicking on the phrase “have gotten” to be going overboard.
    I am a rather nitpicky English maven myself, but I know when I am reading something that makes sense even though the exact phrasing could be interpreted otherwise. I don’t think that people are going to make their minds up on her knowledge and abilities based on her verb tense usage, nor should they.
    If she is as ignorant about current events as you imply, we will have plenty of opportunities to see it in the next 50-some days.

  73. Qingdao

    What if this dumb broad had stepped up to the mike and said:
    “I don’t actually know that you are right that the most adamant privatizers of the GSEs were Republicans; might be true, but haven’t tabulated.” The Barbers, Taxi drivers and Bloggers
    United would demand: “Well go TABULATE!”
    Professor Chin continues:
    “The sheer misunderstanding makes me fear that even if she might want to get to an end-goal that is similar to mine, she might undertake a path that results in an even bigger blow-up;”
    The sheer bizarre-ness of Professor Chin’s fear that Ms. Palin will all-by-her-self “undertake a path that results in an even bigger blow-up” suggests we have long ago left the world of rational discourse and entered into the familiar, less edifying barber shop.

  74. Menzie Chinn

    Qingdao: Thank you for your insightful comments. I admire your equanimity. I do think ignorance is something to be worried about. The quote reminds me of the surprise President Bush evinced when he found out there were multiple sects of Islam being practiced in Iraq.

  75. Dr Zen

    Wow. You hope and hope against hope that Americans are not dumb enough to fall for Palin/McCain, and then you read these comments and you despair.
    Palin was plain wrong. Obama correct but saying nothing much. They’re big and you can’t let them fail. That should be obvious to a reasonably smart 12-year-old. They should be made smaller? How? They weren’t too big when the bubble was being inflated. Smarter? They’re not unsmart. More effective? They do what they’re supposed to do very effectively. The question is whether they should be doing what they’re doing in the first place.

  76. MarkS

    Anonymous @8:58 –
    The source of the “slush funds” that facilitated the overleveraging of the financial markets included all the money center banks, the GSEs, and private equity companies… Bribes (campagn contributions) were distributed to both democrats and republicans without discrimination. Make no mistake, the rationalization for the overleveraging and neglegent risk management was the derivative market. That $800 Trillion notional value of those derivatives hangs like a huge snowdrift waiting for the right shock to cause an avalanche of distruction.

    RealThink @ 8:33-
    Thank you for injecting some sanity into the discussion! The real reason that real estate is crashing is that the market has been diluted by overbuilding. You are also correct in alluding that deflation is the rational way out of this morass. The rising sun is showing the way for Uncle Sam.

    Sarah-
    I’ll give you a free pass, since I doubt you have had time in your life to learn whats up in the capital markets. I will not give a free pass to Chris Dodd, Rich Shelby, Charles Schumer, and the rest of the idiots that allowed this to get so out of hand. I hope they are all defeated when they stand for re-election. I would appreciate it however, if you would stop shilling for the red-meat reactionaries.

  77. Broxburnboy

    Palin is showing the same cogent grasp of economic issues displayed by GW Bush. “Wall Street got drunk and now has a hangover”. Just what we need.. insightful economic analysis from the next generation of neocon economic thinkers.

  78. Kady

    @MarkS and @RealThink. I basically agree that the only way out of this financial quagmire is to accept that the US (and the world along w/ us) is going to enter a prolonged period of economic downturn, during which time our financial system will work the excesses of the past 2 decades out of its pores. However, there is still considerable debate about whether it will be a deflationary or inflationary cycle that we see. On the one hand, the continued tightening of credit that will happen if the Feds simply stops the GSEs from participating in the mortgage market will cause housing to further drop. On the other hand, if the economy tanks, surely the various foreign gov’t that hold in aggregate several trillion dollars worth of treasuries and additional trillions of Agency debt will start dumping those on the free market, causing inflation. Do they offset each other?
    Personally, I’m livid that Paulson (1) did not zero out the common stock and (2) did not force the Frannie/Freddie debtholders to take a haircut. By agreeing to guarantee the debt, to purchase MBS off Fannie and Freddie’s books, and apparently to let F&F keep their NOLs despite the change of control, he is simply pushing off the pain once again.
    A prolonged downturn will have other effects: it will finally force the US consumer to cut their debt spending and get back into positive saving rates. Maybe even stop the US consumer from being the force driving the entire global economy.
    Ppl will say I suck b/c I’m wishing for a recession, and it’s true, I don’t know whether the benefits of one right now will outweigh the pain that pretty much every American (except those who raked in the multi-million dollar bonuses during the financial industry hey-days) will feel. But I feel pretty confident in saying that if we push this off any further with Paulson/Bernanke-esque stop-gap measures, it will only ensure a far harder fall down the road.

  79. GK

    Sadly, Menzie does not hold Obama to equal standards of having to understand economic issues. Obama, after all, is at the TOP of the ticket, unlike Palin.
    Installing a President through affirmative action is not good.

  80. GK

    “The quote reminds me of the surprise President Bush evinced when he found out there were multiple sects of Islam being practiced in Iraq.”
    As opposed to Obama thinking the US has 57 states?
    Affirmative Action should not apply to the installation of a President.

  81. Randy Miller

    I watched Paulsen on C Span Sunday. Did I understand him correctly, in that he was saying Freddie and Fannie would be allowed to increase their portfolios until December of 2009, and then they would gradually start to shrink them?
    I almost feel sorry for Sarah Pallin. McCain took an unseasoned politician with potential, and rushed her onto the national stage. There are a lot of people out there who say she should not be interviewed by tough questioners and their reason seems to be that she is a woman. My three daughters would take serious offense at that, because it is demeaning, implying that women are the weaker sex. Pallin has to answer serious questions. I have always liked McCain, but I am starting to worry that he is a loose cannon, because the Pallin choice was done in haste after the Republican hierarchy told he he could not have Liebermann.
    I think the Fannie Freddie bailout was done to reassure the foreign investors that they will not lose their shirts on this; if the Chinese and Saudis quit buying American debt, you are going to see a very nasty credit crunch, more likely a financial panic. Of course, if the Chinese and Saudis quit buying our debt, and created that panic, the American people would not be able to afford Chinese manufactured goods or Saudi oil.
    We are in a financial and economic swamp, and we have to very carefully extricate ourselves from it. And that extrication will have to be led by the next president. So, which of the candidates do you trust to think through the situation and come out with wise decisions?

  82. assman

    I don’t think Palin is wrong. They are too big and they do cost the taxpayer a great deal. Let me explain how:
    If I sell a out of the money put for zero dollars I could say that it costs me nothing. The real truth however is that the put is valuable and that I have realized some mark to market loss equal to the price of the put. Normally (but not always) in any bank this would be recognized . What Menzie is saying is that we should pretend that the put is worth zero dollars and the loss only exists of the puts expire in the money. I say this logic is wrong. You have realized losses as soon as you sell the puts.
    The government has implicitly given free CDSs to Freddie and Fannae which Freddie and Fannae have then given to preferred shareholders and bondholders to reduce the cost of raising capital. This is the logical way to look at the situation. So maybe Sarah Palin is far far smarter than Menzie. She recognizes that those CDSs have real value.
    You could view this from an opportunity cost point of view. The government could sell the CDSs at market prices and realize a profit instead of giving them for free to GSEs.

  83. Charles

    I have looked at what Buzzcut claims on Fannie and Freddie donations repeatedly and cannot reproduce his numbers. To take one example, this link gives Dodd for 2003-2008. It lists Freddie Mac as $28.8K. Similarly, I get $18.5K for Fannie Mae.
    Maybe he’s comparing contributions for the 30 years of service by Dodd against the two years of service by a new member, or the $2.8M that a Senator like Dodd has to raise over two years vs the $63K that a representative like Barbara Cubin might raise. Whatever recipe he used, the data–I believe–have been cooked.
    Fannie and Freddie spread their money pretty evenly between the parties. Any implication that they influence Dodd any more than they influenced any number of Republicans is just not intellectually honest.

  84. W.C. Varones

    The CBO just declared that all the Fannie/Freddie toxic waste belongs on the U.S. govt balance sheet.
    To say that FNM and FRE have gotten too big and too expensive for the taxpayers is an understatement.
    Palin 1, Menses 0.

  85. John Connor

    Perhaps Sarah Palin used the past tense because she is really from the future. She came from a world where FF had long been an enormous taxpayer burden. It all makes sense, see?
    On another note, I wonder if James Cameron has spent any time up in Alaska recently?
    Palin-Schwarzenegger 2012!

  86. Buzzcut

    You can also see here that FNM/FDM give more to Democrats. A lot more.
    But maybe that makes a lot of sense, Dems are in control of Congress.
    And I’d be giving Obama boatloads of money if I were them. He’s going to pull this one out by a hair, I predict.

  87. W.C. Varones Blog

    U of Wisconsin prof Menzie Chinn

    Perhaps Menses, being an incurious dim bulb, labors under the popular misconception that Fannie and Freddie only funded high-quality mortgages. Taking a quick look at their balance sheets, as Dr. Housing Bubble did, would have disabused him of this n…

  88. Menzie Chinn

    W.C. Varones: Regardless of what you say, she’s got the causality wrong, and in a way that shows that she has no understanding of contingent liabilites. If you don’t understand why you got somewhere, you are unlikely to understand how to get out. Further, the “small” argument does not make sense without a further analytical framework — or have you forgotten the S&L crisis? Lot’s of relatively small institutions…

  89. TheCaptain

    Regardless of what you say, she’s got the causality wrong…
    Where did she say anything about the causality? Or is it simply your inference (political bias) that she has no understanding of the causality?

  90. TheCaptain

    I am starting to think that the real problem here is that you are correct: you are having trouble dissecting what she said….

  91. colonelmoore

    Menzie,
    Thank you for clarifying what your beef is with Sarah Palin’s statement. Your objection is that no one knows how much these two entities are going to cost us, so she is factually incorrect when she says that they have gotten too expensive.
    My original point was that political discussions often proceed on the basis of too little information and thus end up as partisan fistfights without doing anything to solve real world problems. As the comments demonstrate, you have succeeded in stirring up a partisan fistfight along with drawing in a lot of negative comments about your powers of reasoning, and that is about all. Could you have found a more productive use of your time than making statements based on so little concrete data and then defending yourself endlessly?
    I understand that for people in academia precision in writing and speaking about specialized fields of study is the coin of the realm. But the rest of us find no need to assume the worst when parsing every sentence a politician speaks or writes (unless we are partisan hacks).
    I assume without asking that Obama knows that there are 50 states in the union in spite of what he said on the campaign trail and I also assume that Palin knows that we are not currently shelling out taxpayer dollars for Fannie and Freddie in spite of using the words “have become.” Maybe I am wrong, but neither you nor I have enough information to make that judgment.
    If this thing bothers you so much, perhaps you should write an urgent email to ABC News suggesting that Charlie Gibson query her on how well she understands the vital issue of contingent liability. But I suspect that he won’t find it as pressing as you apparently do.

  92. Joseph

    Menzie Chinn is doing a great service here that I wish other economists had the courage to perform — standing up and telling the public when politicians lie about economic issues.
    Sarah Palin was making the typical conservative propaganda point to suggest that this was just another example of a government program that had failed and that the answer was privatization. She was totally ignorant of the fact that the GSEs had been privatized 40 years ago. But that didn’t matter to her. What as important was making a cheap point about the evils of government.
    One of the reasons the general public holds economists in contempt is that so many of them seem to have no principles about the truth. Economists like Greg Mankiw, Glenn Hubbard and Phil Gramm served their political masters by providing cover when George Bush and John McCain lied to the public every day about how tax cuts pay for themselves. Or that George Bush lied to the public about the fact that his tax cuts would benefit primarily the wealthy. Mankiw, while serving the white house, promoted policies that directly contradicted his own textbook. It seems that economists are willing to lie to the public in order to promote policies that they prefer, since telling the truth would be a harder sell. The end justifies the means.
    But the real disappointment isn’t those few who serve the politicians, it the vast majority of economists in academia who remain silent about these lies to the public and avoid criticizing their colleagues. The likes of Mankiw, Hubbard and Gramm should be scorned and ostracized by their colleagues instead of welcomed back into their community after they have done their dirty deeds.
    Mr. Chinn is serving the public by his willingness to call a lie a lie. It is too bad more economists aren’t willing to serve the public.

  93. Charles

    Rich Berger says, “If you read the link that supports Buzzcut’s numbers you will see that it is combined money for 1989-2008…”
    That’s the first sensible thing I can remember you saying, Rich. Thank you. It helps me keep in mind that everyone has something to add.
    _____________________
    Buzzcut, thank you for providing the link. I withdraw my criticism.
    Now, if you would read your own —–ing link, you will see it says, “Both companies have poured money into lobbying and campaign contributions to federal candidates, parties and committees as a general tactic, but they’ve also directed those contributions strategically. In the 2006 election cycle, Fannie Mae was giving 53 percent of its total $1.3 million in contributions to Republicans, who controlled Congress at that time. This cycle, with Democrats in control, they’ve reversed course, giving the party 56 percent of their total $1.1 million in contributions. Similarly, Freddie Mac has given 53 percent of its $555,700 in contributions to Democrats this cycle, compared to the 44 percent it gave during 2006.”
    In other words, this is all politics as usual. The article may be headlined that FNM and FRE are “investing” in Democrats, but an honest reading is that the contributions have been flowing to both parties. Any excess amount given to Dodd is purely due to his length of service.
    Criticism of Obama for getting campaign contributions is fine. One should consider that he’s running for president–where the sums required are in the hundreds of millions–so it’s a far less likely to influence him than it would be for, say a congressman. But I agree that Obama’s connections in the financial world are a legitimate issue.
    Dodd is one of the few good guys in the Senate. Because his father was run out of politics over misuse of campaign funds for personal purposes, Dodd has been like Caesar’s wife on conflict of interest issues. He does not deserve to be slandered, even by implication. The politics of personal destruction directed against people like him is the reason that so many out-and-out crooks, like Bob Ney, Duke Cunningham, William Jefferson, and Tom Delay–all under indictment or sitting in prison–got into Congress.

  94. Unsympathetic

    Palin is a useless puppet whose only contribution would be the removal of Lane Bryant from the White House closets.
    She’s so incompetent it’s laughable that anyone actually pays attention to the words she says.
    Just because she breathes air does not give her views credibility, as if somehow they “deserve” to be “considered.”

  95. Rich Berger

    Unsympathetic is a useless puppet whose only contribution would be to make everyone laugh.
    He’s so incompetent it’s laughable that anyone actually pays attention to the words he says.
    Just because he breathes air does not give his views credibility, as if somehow they “deserve” to be “considered.”
    Just wanted to see the results if I turned your words back on you.

  96. Richard

    Charles: Thanks for revealing yourself. You’ve certainly learned your polemics well.
    The substantive issue, again, is that Menzie (who posts excellent stuff) has drawn massive conclusions from little. That, unfortunately, can occur when a statement is viewed through a partisan lens. Menzie wrote that “the ‘talking point’ might be correct, but the statement belies a complete lack of comprehension about how we arrived at this situation, let alone the institutional structure of US finance.” So the tiny statement is correct but somehow Menzie understands that, in sum, it shows Palin doesn’t understand the “institutional structure of US finance.” Unfortunately, there is not enough substance in the statement to make an argument so all we got was a cheap shot whereby Menzie “doesn’t know where to start.” Well, perhaps he should condescend to his readers and try. I think ColonelMoore at 9:09 put it well. (Nevermind the secondary point, regardless of your opinion about Palin, that few non-economists, let alone most politicains understand the “institutional structure of US finance.” Such contempt is why, perhaps, no economist has ever been elected to such a high office.)

  97. Paul in NJ

    This forum would benefit if some posters could keep their ideology out of their comments. Just a sampling:

    Brian: The Palin statement suggests the problem is that they were ever allowed to get so big in the first place, which is like saying that the US economy is too big. These firms serve the housing market, they don’t dictate its size.

    First, they long ago strayed from their original charter, which was fostering responsible homeownership. Just one example, Calculated Risk has long lamented their expansion into Alt-A-type programs as a way of expanding market share.

    As for ‘serving the housing market,’ see above. They serve themselves first, as a series of reports in the WSJ have shown over the years. (Sorry, don’t have cites at hand.) Or did you miss that part of the bailout that supposedly shuts down their lobbying division? There just might be good reasons for that, and one reason is named Barney Frank.

    One Salient Oversight: Too expensive to taxpayers? No until they were Nationalised over the weekend. Palin gets that fact wrong.

    Oh, come on – they’ve profited greatly by the ‘implicit’ Uncle Sugar guarantee over the years and grew like topsy. Now it’s simply an explicit guarantee – and note that suddenly capital is starting to flot again.

    Make them smaller and smarter? By doing what? Downsizing? Letting the market take over their function? [Palin] doesn’t say anything here of substance.

    Perhaps you are unaware that part of the bailout requires them to downsize. And, yes, I’d say that letting the market back in – rather than squeezing competitors out, as Fan and Fred have done – makes a helluva lot more sense. ‘Eggs in one basket’ and all that.

  98. Alan

    All of you who say Palin is poorly informed because she said “Fannie and Freddie are too big and too expensive to tax-payers” are yourselves poorly informed: The state tax exemption of Fannie and Freddie, joined to permissive accounting rules reducing their Federal tax liability, have made them extremely expensive to taxpayers over the course of their history. Too many of you are unjustifiably smug.

  99. Brian J

    I guess I’m one of the guys ignorant of basic finance, because I don’t see how they’ve cost us any money over the years. To take just one example:

    They taxpayers took on a liability worth huge amounts of money without compensation. If a private entity had provided that loan guarantee, it would have demanded payment of the risk it took. The taxpayers did not get fair compensation for taking on the massive liability. Who would seriously argue that is not a cost?

    In what ways did this cost the government money? I can sort of see where you are coming from, but I am not sure.

  100. W.C. Varones

    Brian J,
    If you cannot see now how this costs the government money, wait until you see the line items in the federal budget in the coming years. Though Menzie is blissfully ignorant of any cost to taxpayers, it will be tremendous.
    Summary for those new to the situation: Fannie and Freddie were giant hedge funds speculating on mortgages. The shareholders and executives (like Clintonista Franklin Raines and Obamunist Jim Johnson) took all the profits, while the taxpayers took all the risk. Well, Franklin and Jim retired with tens of millions, and now the taxpayers are on the hook for hundreds of billions.
    Fannie and Freddie’s debt is now larger than the value of the crappy mortgages they hold and guarantee, and Paulson has just made the taxpayers responsible for the whole thing.
    To simplify: Fannie bought a $300,000 mortgage, then sold a bond for $300,000 to the Chinese treasury to fund it. Now the house is in foreclosure and worth $150,000 after expenses. Hank Paulson just stepped in and paid China, and said the taxpayers will pay the $150,000 difference.
    Privatize profits, socialize losses. Nice job if you can get it as a Clinton crony.

  101. Brian J

    If you cannot see now how this costs the government money, wait until you see the line items in the federal budget in the coming years. Though Menzie is blissfully ignorant of any cost to taxpayers, it will be tremendous.

    They weren’t put into receivorship until this past weekend. Palin was clearly speaking as if they had been costing us money for quite a long time, not about adding debt to the government books. So again, I ask, how have they cost us money in the past?

  102. Menzie Chinn

    From Reuters today:


    McCain, other lawmakers invested in GSEs: report

    Wed Sep 10, 2008 4:16pm By Kevin Drawbaugh

    WASHINGTON (Reuters) – Dozens of members of the U.S. Congress, including presidential candidate John McCain, had investments last year in Fannie Mae and Freddie Mac, possibly putting a keen edge on their interest in the companies’ troubles, a watchdog group said on Wednesday.

    Twenty-eight legislators had between $598,100 and $1.7 million of their own money invested in Fannie and Freddie in 2007, the latest period for which financial disclosure forms are available, said the Center for Responsive Politics.

    Republican Arizona Sen. McCain “reported having up to $10,000 invested in the two companies — up to $9,000 worth in bonds and up to $1,000 worth of stocks,” said the nonpartisan center in a report on its Web site at http://www.opensecrets.org.

  103. Arnold T

    From Palin’s background and Resume, one has to assume that she knows next to nothing herself on these and similar matters.
    All her quotes are either from a script or she is taking a risk and using her home spun ideas, hoping to get away with it. But, we should expect accurate quotes if made by a presidential ticket contender.
    Freddie and Fannie did NOT operate with tax payer dollars. And Palin obviously alludes to Freddie and Frannie as Big Federal Government Agencies because she’s gonna make them “smaller and smarter” like the Republican government ideals. Palin is clueless here.
    And Freddie and Fannie never originated loans directly to Homeowners, so there is no connection to the homeowner as stated. Palin is talking from painted lips.

  104. Arnold T

    One Comment that points the finger where it should be pointing. Freddie and Frannie did not originate the sub-prime loans that essentially created the present financial crisis. Capitalism’s FREE MARKET Financial institutions did it all by themselves. Homeowner’s got conned and stock investors got conned.
    The fact is, we need a little good old fashioned conservative banking where loans are vetted properly and transparency demanded before a loan is made. Now since this obviously cannot be done voluntarily, human nature being what it is, we need regulations, laws and criminalization.
    I cannot imagine anyone thinking that people will just get along if we leave each other alone. I have met too many scammers that lie, cheat and steal. Countries that excel economically monitor and criminalize destructive behavior. We are not excelling.
    Our titans of free market financial capitalism failed us ethically and morally. It could very well usher in the longest stagnation period and deepest wealth destruction seen since the Great Depression.

  105. W.C. Varones

    Brian J,
    The markets have always assumed the taxpayers were on the hook for Fannie and Freddie losses.
    Anyone who believes the taxpayers bear no costs until an actual cash outlay happens needs to take a remedial economics course.
    Besides, Palin was not “clearly speaking as if they had been costing us money for some time.” That they “have gotten too expensive” as of last weekend when the bailout was apparent is obviously absolutely true.
    Menzie, yes, politicians from both sides of the aisle were complicit in the Fannie/Freddie scam. But it’s disappointing to see that a serious economics blog has devolved into ignorant, partisan cheerleading.

  106. John Thacker

    Menzie, considering that you several months ago insisted on this blog (in response to a comment on mine) that there was no risk from Fannie and Freddie’s moral hazard in the current mortgage crisis because they didn’t issue subprime mortgage loans directly, and that they should be expanded and allowed to buy larger mortgages, I don’t think you have much room to talk.
    I attempted to make the point that Fannie and Freddie, while not issuing those mortgages, were engaged in a lot of repurchasing of mortgage-backed securities backed by subprime mortgages, but you didn’t want to listen.
    The lower risk premium for borrowing was enjoyed for years when it helped borrowers as well. It’s true that the risk of catastrophic non-independent failure was low, and people disagreed about the proper risk models. But the cost was incurred when the guarantee was imposed.

  107. John Thacker

    According to Open Secrets, the top recipients in 2008 of FNM are Lamar Alexander, Saxby Chambliss, Sherrod Brown, John Cornyn, Melissa Bean, Roy Blunt, Rahm Emmanuel, Randy Neugebauer, and Nancy Pelosi with $10,000 apiece– 5 Republicans and 4 Democrats.
    According to Open Secrets what now? Sen. Obama is #3 overall from 1998 to 2008 in FM/FM contributions with $105,589, despite only having half a term to go on.
    McCain, other lawmakers invested in GSEs: report
    Ah, yes, Menzie. Sen. McCain had $10,000 invested in the GSEs, including $1,000 in stock that looks like it’ll be a loss. OTOH, Sen. Obama received $105,589 in contributions from Fannie and Freddie, but for some reason you don’t see fit to mention that. Odd.

  108. DickF

    Reuters (Menzie):
    Republican Arizona Sen. McCain “reported having up to $10,000 invested in the two companies — up to $9,000 worth in bonds and up to $1,000 worth of stocks,”
    McCain is dumber than a skunk. Anyone who would invest in Fannie has to be a moron. At least Obama is smart enought to take rather than give. I wonder which is worse, a smart con-man sucking at the government teat or a stupid investor throwing his money down a black hole.

  109. John Thacker

    Of course, it’s silly to paint this as a purely Democratic scandal. While it’s true that some Republicans tried to reform or increase oversight of the GSEs (such as the Bush Administration in 2003), it’s also true that the reforms would not have been blocked without Republicans like former Rep. Oxley defending the GSEs. (And getting plied with lobbyist money too.) After all, they did hold a majority.
    The GSEs gave a majority of their money to Republicans when Republicans had a majority, and give the other way now. About 55-45 for the majority each way. Within each party there have been both GSE allies and reformers. (Rep. Barney Frank definitely counts as a GSE ally.)
    Equating a $10,000 investment with $100,000 in contributions is interesting, Menzie.

  110. Buzzcut

    Charles, you’re off the deep end defending Dodd.
    Point of fact, over the ’89 to ’08 period, Republicans were in control almost as equally as Democrats. Thus, over that period, there should be an equivalent Republican to Dodd.
    There isn’t.
    And the fact that Hillary and Obama are in the top 4, neither of whom has been in the Senate very long, should be telling you something.
    I do agree that the numbers tell us mostly about who is in power. Doesn’t change the fact that Dodd, Clinton, and Obama are outliers.

  111. Brian J

    W.C. Varones,

    The markets have always assumed the taxpayers were on the hook for Fannie and Freddie losses.
    Anyone who believes the taxpayers bear no costs until an actual cash outlay happens needs to take a remedial economics course.

    Okay, I can accept that idea, except that, nobody has provided any numbers to back up that claim, including Palin. Can you?

    Besides, Palin was not “clearly speaking as if they had been costing us money for some time.” That they ‘have gotten too expensive’ as of last weekend when the bailout was apparent is obviously absolutely true.

    Um, it absolutely looks like that. She was certainly speaking in the past tense. But again, neither she nor you nor anyone else on this blog has provided numbers about the alleged cost to taxpayers, either directly or in the assumption of liabilities.

  112. W.C. Varones

    Brian J,
    If you’re going to claim that the lack of a point estimate for the eventual cost means that there will be no eventual cost, then there’s nothing I can do to help you. Enjoy the bubble you live in.

  113. W.C. Varones

    Brian J,
    If you’re going to claim that the lack of a point estimate for the eventual cost means that there will be no eventual cost, then there’s nothing I can do to help you. Enjoy the bubble you live in.
    Menzie acknowledged one $300 billion estimate in his original post, but obviously no one knows. If you are going to claim it’s zero, you are in rare company.

  114. Joseph

    It’s too bad that more economists can’t help out the public in understanding the issues for this election. McCain and Palin are basing their campaign on the idea that they are “mavericks”, fiscal conservatives, that will change the way things are done in Washington. Fiscal issues are a subject that you would think that economists would be able to speak to. So let’s look at the McCain/Palin claims about fiscal conservatism.
    Sarah has claimed in more than 20 speeches about the Bridge to Nowhere that “I told Congress, thanks but no thanks on that bridge to nowhere. If our state wanted a bridge, I said we’d build it ourselves.” Now it’s hard to pack two lies into just two sentences but she managed it. As you may recall, the brouhaha about the bridge to nowhere occurred in 2005, nearly two years before Palin was governor. It was Congress that withdrew the earmark in embarrassment before Palin was even governor so there was no way in which she told Congress “no, thanks.” In fact it was Congress that told Alaska, “No, way.” Palin is simply lying. But she goes farther. She said “if our state wanted a bridge, I said we’d build it ourselves.” Instead, in her campaign for governor in 2006 she explicitly promised to try to reinstate the earmark that Congress had already removed. When she became governor did she say they would build it themselves? No, in a speech she said that Alaska could not afford the bridge because they could not get the Congressional earmark. And finally, did she save the American taxpayer anything by rejecting an earmark. No again, because she accepted and spent the full amount originally earmarked for the bridge, $223 million, except she spent it on other highway projects as required by congress. You would hope that economists could help out the incompetent press corps to straighten out this fiscal issue.
    Palin and McCain’s second claim to fiscal resposibility is that Palin sold the governor’s private jet on eBay — and made a profit. Here they managed to pack two lies into just one sentence. First off, the plane was put up for sale on eBay, but that was not a great new innovation by Palin. It was standard operating procedure for the state of Alaska for many years. In fact Alaska sold an old ferry for $390,000 in 2003 on eBay, years before Palin became governor. Second, the jet did not sell on eBay. They failed to get a single minimum bid. So they eventually had to turn the jet over to an airplane broker who sold it nine months later. Meanwhile it cost them $20,000 per month in interest payments. They finally sold the jet for $2.1 million (before commission). But the plane originally cost over $2.7 million two years earlier. Now maybe it takes an economist to point this out, but $2.1 million is definitely less than $2.7 million so it hard to see how Palin made a profit on the deal, not even considering interest and commissions.
    Palin’s next claim for fiscal conservatism was that she fired the governor’s chef. She said she could make the kids sandwiches as well as anyone else. Well it turns out that this is a lie as well. She didn’t fire the chef, she reassigned her as a legislative aide so she didn’t save the taxpayers a dime. In fact, the chef served Palin and her family for the first seven months of her adminstration while she was in governor’s mansion in Juneau. It was only when she went back to her home in Wasilla for the summer at the end of the legislative session that she transferred the chef. And making sandwiches for herself? Well it turns out that she billed the state for meals per diem for 300 days in which she stayed at her own home in Wasilla. And she’s only been in office for 18 months. Now that’s a fiscal maverick!
    So is Palin an enemy of earmarks as she claims. When she was mayor of Wasilla, one of her first actions was to hire a congressional lobbyist — for a town of 8000 people. She was quite successful. She garnered over $27,000,000 — over $3000 per citizen. This is over 100 times the earmarks for a citizen of New York. In fact you can see a city memorandum reporting on the success of her lobbying effors in which she scribbles in the margin in her own handwriting, ” FYI This does not include our nearly one million Dollars from the Feds for our Airport Paving Project. We did well!!!”. She continued her lobbying efforts as governor. Alaska under her adminstration has scooped up over $500 per capita in earmarks — more than 10 times the rate of any other state in the union.
    Now, McCain claims that he is going to balance the budget by vetoing all earmarks. This is a dubious claim since the president doesn’t have a line-item veto. But let’s assume it is true. All earmarks combined amount to only $20 billion and the deficit this year will be over $400 billion. Maybe the economists can help us out and tell the public that McCain is lying about his budget. You would think that the economists could straighten out these “complicated” fiscal issues because lord knows they seem to be much too “complex” for the press to figure out.

  115. Brian J

    W.C. Varones,
    That’s an excellent straw man, but nothing else.
    I simply asked, if we are to accept your claim, it’d be nice to have some numbers. This is particularly true, I believe, if they’ve cost us so much for so long.
    Maybe it’s a lack of familiarity with finance and accounting, but it looks like the $300 billion number is being touted as what it’s costing us now. Or is that number the same as what it’s been allegedly costing us for years, since we are only now being held responsible for the liabilities?

  116. Menzie Chinn

    John Thacker: You mis-represent what I wrote in my comments to my August 19, 2007 post. In that post, I was clearly pointing out to the lack of regulation as the key initiator of the currently ongoing financial crisis. I did not state that the GSEs were blameless. But I believe that my view (with differing proportions of blame attributed to monetary policy and financial non-regulation by different observers) is by far the most common view among the informed. The link is above, and people can check out the thread themselves.

    Regarding the omission of contributions received by Obama, there’d been plenty of statements to that effect earlier in the thread. I was trying to add to the discussion, as opposed to persuade by mere repetition.

    Richard: I still don’t understand how Palin’s statement is factually correct. It certainly wasn’t when she made it; and as I have pointed out, small instituions en masse have been bailed out (S&L anyone?). The argument that they got “too big” was wrong. What would have been correct is that they were not regulated as they should have been.

  117. W.C. Varones

    No, Brian. No one has spent $300 billion.
    What has happened is that the taxpayer is now guaranteeing the GSE debt. The eventual loss will depend on the value realized from the accompanying assets.
    The fact that I even have to explain that is an illustration of my earlier point that this is no longer a serious economic blog but a bunch of partisan fools screaming about something they don’t understand.

  118. Brian J

    I never said anyone or any body “spent” $300 billion. I simply used “cost” in the same way that you did when you referred to that number in a previous post.

  119. Charles

    W. C. Varones, let’s see what comes out of the probe of Countrywide’s sweetheart loan program. In politics, there are lots of allegations thrown around. Only a few of them are proven.
    My estimation of Dodd’s character is based on 30 years of him taking stands based on principle, stands that did not help him politically. I’m willing to accept that he may have stumbled, but I want to see the facts.
    On the issue at hand, he actually took a smaller proportion of his campaign contributions per year from FNM and FRE than, say, Gary Miller, despite the fact that he’s held a key position in banking for longer. The mortgage crisis is very much a bipartisan scandal.
    ____________________
    Richard, it’s wonderful that you’re the only person qualified to understand the history and evolution of the crisis at Fannie and Freddie. Even more amazing that you can actually read my mind and know exactly who I am! What a delight it must be to be as wise and all-knowing as you!
    So, rather than wasting time with us, why don’t you leave the rest of us mugs to muddle through?
    ____________________
    Buzzcut, let me explain to you why you are wrong in inferring that just because Dodd’s career contributions are the highest, that he was most likely to have been influenced by those contributions.
    First, there’s the length of service. The figures we are given extend back to 1989, if I understand OpenSecrets correctly. Congressman Gary Miller has received $25,500 for his six years in congress vs. Dodd’s 133,900 for his career. Dodd has received $43.3M over the course of his career. The $133,900 represents 0.3% of his contributions. By contrast, Miller has raised $3.4M. The $25,500 represents 0.75% of his contributions. Yet Miller doesn’t even appear on the Open Secrets list!
    Another question to be answered is how many of those contributions came from the PAC or from the officers versus how many came from employees. It makes a difference.
    In this case, I think that they largely came from PACs/officers. But I don’t know that for a certainty, because Open Secrets’ search function, well…sucks.
    As for Hillary and Obama, have you checked whether the donations were to their senatorial re-election committees or to their presidential campaigns? They have both raised enormous sums for their presidential campaigns. A hundred thousand bucks is less than one tenth of a percent for a campaign that’s raised $400 M.
    ___________________
    John Thacker, please don’t blame Menzie for my error.
    In the post you referred to, I was looking at PAC contributions and missed the individual contributions. Open Secrets has a few problems with its data interface, as I learned to my chagrin.

  120. co

    I continue to be amazed at the size of the mountain that has arisen due to Menzie overdrawing conclusions from a statement that had far too few words to be dispositive. Before, the issue was high dudgeon over the use of the past tense and the implication that she didn’t understand contingent liabilities. Now Menzie is saying that Palin’s argument that the GSEs got “too big” was wrong.
    This is something that we can bite on, because either they are too big or they aren’t. Menzie says that they aren’t too big. Let’s see who else has used or clearly implied the words “too big” in referring to Fannie and Freddie. (Note that this excludes “too big to fail,” which is a different concept from simply too big.)
    http://seattletimes.nwsource.com/html/editorialsopinion/2008135615_toobiged25.html
    “Fannie and Freddie: simply too big”
    William Poole, former St. Louis Fed president
    http://www.nytimes.com/2008/07/27/opinion/27poole.html?ref=opinion
    “There are more general economic reasons for liquidating Fannie and Freddie, the biggest being that it is very dangerous to maintain such a large role in any market for only two operators.”
    Alan Greenspan
    http://www.federalreserve.gov/boarddocs/testimony/2005/20050406/default.htm
    “Limiting the systemic risks associated with GSEs would require that their portfolio holdings be significantly smaller.”
    Alan Greenspan
    http://www.financegates.com/news/market_news/2005-04-14/ff1404retg.html
    “Federal Reserve Chairman Alan Greenspan suggested downsizing [Fannie's and Freddie's combined portfolios] to $200 billion.”
    Arnold Kling, former senior economist at Freddie Mac
    http://econlog.econlib.org/archives/2008/07/too_big_to_bail.html
    “The growth of Fannie and Freddie has been such that they are beyond too big to fail. They are actually too big to bail.”
    Janice Revel, Fortune Magazine
    http://money.cnn.com/magazines/fortune/fortune_archive/2004/10/18/8188047/index.htm
    “Way too big–far too risky. Those have always been the major worries when it comes to Fannie and Freddie.”
    Why are Menzie and cohorts picking apart every word of Palin’s when they haven’t given similar treatment to the legions of qualified people that have expressed similar concerns? Rather than pick on her comprehension of the issues based on her use of the words “too big,” why not open up a new thread in which Menzie makes the case against Alan Greenspan? Wouldn’t that raise this discussion above its current level of taking cheap shots at candidates and move it back to the high level of economic discourse that has brought Econbrowser to number 2 on the list of econ blogs?

  121. Menzie Chinn

    co: There are many institutions considered “too big to fail” in the US economy. Some of them are GSEs, a good number of the are private. The United States government has a long history of saving institutions so identified, regardless of whether you agree or not with those actions. So by the logic you have just laid out, is Palin also suggesting that Bear Stearns should have been broken up pre-crisis. Maybe also Citibank. Perhaps GM. Maybe anything bigger than a certain asset size should be broken up into S&L sized entities. Would that solve the problem? Perhaps. Perhaps not.

    None of the foregoing changes the fact that Palin’s statement illustrates a failure to distinguish between explicit and contingent liabilities.

  122. colonelmoore

    Menzie, “co” is really “colonelmoore.” It was a typing error.
    Two points in response:
    1) I prefaced my comments by saying that one could quibble over whether her statement showed an ignorance of contingent liabilities. You believe it does. I think she was using tolerably colloquial language to get a point across. We disagree. Let’s drop it.
    2) You wrote, “The argument that they got ‘too big’ was wrong. What would have been correct is that they were not regulated as they should have been.”
    I found this statement to be much more interesting. I went looking for support for Palin’s idea. And I carefully noted that I wasn’t counting “too big to fail” because it is an entirely different concept from “too big.”
    I found that Alan Greenspan, William Poole, Arnold Kling, the Seattle Times editorial board and a Fortune Magazine staff writer all agree with Palin.
    I still maintain that it may be time to stop picking on Sarah Palin and get back to economics. Her sum total opinionating on this subject consisted of the words, “The fact is that Fannie Mae and Freddie Mac have gotten too big…” (not too big to fail). If you disagree that the GSEs got too big, then take up your disagreement with Mr. Greenspan. His writings on the subject are extensive and should provide plenty for you to disprove.
    There are thousands of blogs fully participating in partisan politics and lowering themselves in the process. Econbrowser risks falling into the partisan cesspool by stridenly going after candidates with so little material to work on.

  123. Menzie Chinn

    colonelmoore: No matter how you parse it, the sentence is:

    “The fact is that Fannie Mae and Freddie Mac have gotten too big and too expensive to the taxpayers. …

    But I take your point, and conclude we have reached the point of diminishing returns on this conversation.

  124. Brian J

    Menzie,
    I hate to be a burden, but if you have a moment, explain how the GSEs actually cost the taxpayers something. It’s been a few years since I’ve taken economics, and I never took a finance source, so while I think I might get it, I am not sure.

  125. Joseph

    You can parse her words all day, but we know that her supporters wildly cheered at her statement because it was the standard Republican dog whistle to the right, perfected by Reagan, that government programs always fail and the private sector always works better. Palin was too ignorant to know that the Fannie and Freddie were already privatized. But facts aren’t relevant — a cheap applause line is all that matters and her audience fell for it.

  126. Charles

    I see there’s deafening silence on OpenSecrets’ report on who held FNM and FRE bonds and therefore stand to benefit personally from legislation protecting FNM and FRE. The top people– and two thirds of the total– happen to be Republicans.
    It’s just wonderful and amazing to see how many converts there are to campaign finance reform– when they think they can score political points.

  127. Menzie Chinn

    Brian J: I have posted a link to W. Scott Frame and Lawrence J. White, 2005, “Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?” Journal of Economic Perspectives 19(2), 159-184. (non-gated version), and have added in the relevant text you that addresses your query in the post itself. As you have said repeatedly, there was no Federal government outlay — that was the point of privatizing Fannie Mae — although there was a contingent liability (contingent does mean that there is a probability distribution, with the outcomes ranging from no bailout to full bailout).

  128. Eric H

    Seconding Col. Moore. Also, motion that Dr. Hamilton do the Coasian thing and buy out Dr. Chinn to eliminate the contingent risk that these partisan posts drag Econbrowser’s reputation down.

  129. Jim

    It is critical that the Federal Reserve and Treasury Department allow Lehman Brothers to resolve their current financial crisis by themselves. The overreaching of government involvement in both the Bear Sterns and Fannie / Freddie rescues has already prolonged U.S. Financial markets recovery without diminishing the overall depth of harm caused to the broader economy. The role of Treasury and the Fed is to protect the “transactional relationships” that form the foundation of modern financial markets, thus protect the availability of capital to the broader economy.
    It is not the role of the Fed and Treasury to protect the interests of equity investors (regular or preferred) or holders of direct corporate bonds. Their interests should be limited to maintaining the markets transactional viability only. Early and extensive intervention have neither reduced risks nor loses in the financial markets and have instead drastically reduced the market’s ability to redeploy capital to areas representing greater growth and profitability. In a market of scarce resources, capital being a foundation resource, there is inherent harm to any action that restricts the free flow of capital to areas of the economy offering the highest growth opportunities.
    The free market must allow for capital destruction in a speedy manner as it is this very process of loss that allows the remaining capital to be quickly redeployed into areas of growth. Constraining this process forces limited capital resources to remain deployed in unproductive segments of the economy thus making the costs of capital higher to high growth segments of the economy. This restriction of growth becomes further compounded as we see a loss of jobs in the contracting economic segments while at the same time we experience limited job growth in high growth economic sectors due to the artificially high capital cost created by government intervention. High levels of government borrowing resulting from increased federal spending against decreased tax receipts further exacerbate this spiral of economic contraction due to inefficient use of capital resources.
    Capital destruction is as crucial as capital accumulation in creating healthy sustainable long-term economic growth. Every major advance of the economy has caused capital destruction that freed financial resources to propel new and overall greater economic growth.

  130. W.C. Varones

    I second Jim’s motion.
    We used to point fingers at Japan for failing to allow their banks to fail. We were so arrogant and said that our financial system was more open, honest, and free. Well, now we are doing exactly what Japan did.
    We’ll find out soon enough whether Paulson will finally put and end to the bailouts. I hope so, but he has always proven himself a coward in the past.

  131. Brock

    The problem with everyone’s reasoning on this is their reasoning is based in politics. This is not a political problem, it is much more of a greed problem on the part of the insurance companies and finance companies who thought they had found a way to turn a sow’s ear into silk purse.
    If there was a group that should have stopped the buck, it should have been Fannie and Fredie, as they ended up being the biggest bagholders in the end.
    What happened was a group of analysts made a case, based on history, that by bundling massive amounts of mortgages into pools and then splitting these into tranches (pieces of the pie) based on risk, they could sell these as ways to increase yield, and the buying financial institutions could earn significantly more profit with limited the risk. This succeeded for a number of years and then home prices started to stall and a few homeowners who should have never been allowed to buy a home, stopped making payments.
    Suddenly, the financial institutions, who purchased these enhanced yield products (and many times borrowed 95% of value of the product to buy it, thereby leveraging themselves up 20 times) started to get a glimpse of the problem. The smart bankers, like Jamie Dimon, intuited the end game and started to unload these enhanced yield products to bagholders down the line.
    This wasn’t caused by the community reinvestment act (CRA) cira mid-90′s. It wasn’t caused by republicans or democrats. It was caused by stupid bankers at Fannie and Fredie who used accounting tricks to hide the problem as long as possible, and then they got out with their golden parachutes. And then the brokerage executive management did the same thing, and it’s all been rolling dowhill since then.
    The sales pitch on Enhanced Yield and Leverage had these jokers thinking they could mint money for themselves forever with essentially no hard work. I guess they were right as the guys at the top now live in the Hamptons and contribute to both political parties. The party de-joure seems to be democrats. In the past it was republicans.
    These enhanced yield products are the 21st century version of Michael Milken’s Junk Bonds. Same kind of appeal, get more for nothing, until the environment changes.
    The leverage was banks and others borrowing at say 4.5% and buying these enhanced yield products with interest rates of 5.5%. By borrowing 95% of the value, they were effectively getting a 20% return on their investment, until it all blew up.
    Punchline, it was greed and peer pressure among bankers, insurance companies, to maximize their return.
    The problem is without government intervention, the people who will suffer are the employees (Paychecks and 401K’s) retiree’s (bondholders) investors and taxpayers. The question is really, how do you minimize the societal harm from these greedy executives who caused this. My vote, have the government pursue them in the courts to take back the golden parachutes. If nothing else the government can pursue them in court until their money is gone…

  132. Charles

    Brock, while I agree with much of what you say, it’s not even clear that “stupid bankers at Fannie and Freddie” had much to do with their own demise, much less the overall mortgage crisis.
    Fannie and Freddie buy mortgages on the secondary market. They don’t deal in complicated mortgage backed securities and derivatives thereof. So, on that score, you’re wrong.
    They also have pretty reasonable lending standards. While, according to Tanta at Calculated Risk, they have stretched the envelope, that’s a small part of the problem.
    Based on what I have read from people who know the area well, people like Tanta, it seems that the problems at Fannie and Freddie were caused by two things: the overall size of the mortgage crisis and the lack of capitalization. The latter can be assigned as “stupid bankers.” But it’s not the fundamental problem.
    The overall size of the mortgage crisis seems to have three basic roots (Bonddad has a good post on this):
    1. American incomes have not been rising
    2. Alan Greenspan lowered interest rates (and failed to use his regulatory authority to monitor lending quality)
    3. The repeal of Glass-Steagall plus stupid bankers at investment banks.
    BTW, Rep. Michael Oxley has a piece in the FT blaming the White House. Purely for amusement purposes.
    It’s a much more complicated (and more interesting) story than trying to blame it on Chris Dodd and Barack Obama. But people whose lives revolve around THEIR candidate being GOOD and the OTHER candidate being BAD have no patience to learn what might really be going on.

  133. Darin

    Palin is a lost cause. It’s unbelievable that McCain chose her for VP. Can’t wait for the debate on Friday and her thoughts on this financial mess.

  134. ColorMeRed

    The taxpayers are bailing out Freddie and Fannie you half-wit. THAT’S WHAT SHE MEANT.
    You need to be dissected Ant Brain.

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