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The Fannie Mae/Freddie Mac Frankenstein

Dan Juneau -   Sep 18, 2008

The Bush administration has put the mammoth quasi-private lending agencies—Fannie Mae and Freddie Mac—into conservatorship and punted the problem to the next administration. It would be wise for the media and debate moderators to press John McCain and Barack Obama regarding what exactly they will do to clean up this mess that is being left at their doorstep.

The Fannie-Freddie debacle is a textbook example of what is wrong in Old Washington. The two agencies are supposed to be regulated by the executive branch with Congressional oversight. Somehow those "protectors" of the taxpayers either didn't have a clue regarding high-risk practices of Fannie and Freddie or were too indebted to campaign contributions and largesse from their lobbyists to call them on the carpet until it was too late. As a result, taxpayers could be on the hook for hundreds of billions of dollars in losses from bad loans and questionable lending practices.

Not all of the blame, however, can be laid at the feet of the suspect management of the two agencies. Over the years, Congress has passed laws and pushed practices designed to pressure Fannie and Freddie to make home loans to buyers who could not afford them. Some of those same members of Congress are now screaming the loudest and pointing fingers at everyone but themselves.

Particularly troubling for Senators McCain and Obama should be the recent Congressional Budget Office (CBO) pronouncement that costs involved with the Fannie/Freddie conservatorship should be included in future federal budgets. It is often the practice of presidents and members of Congress to not include federal fiscal liabilities in the budget. Disaster relief and wars, for example, aren't considered federal debt for the purpose of the budget. At the same time the CBO was dropping its bombshell about the Fannie/Freddie problem, it was also giving its official estimation of a $407 billion federal budget deficit for this fiscal year and a $438 billion deficit for the next.

The deficit figures don't factor in any other bailouts likely to occur because once some entities are determined to be "too big to fail," the demarcation line for making that decision becomes very hazy.

Senators McCain and Obama would do well to heed the words of Peter Orzag, director of the CBO, who recently said: "This nation is on an unsustainable fiscal course." To illustrate his point, Orzag noted that Medicare and Medicaid spending alone is expected to jump 30 percent in the next decade from the current level of 4 percent of the GDP to 6 percent in 2018 and 12 percent by 2050. The question is: What will either of them do to reverse this recipe for fiscal disaster if elected to the highest office in the land? Both say they will cut taxes in some form or fashion, but will not offset spending sufficiently to pay for the reductions. Some of the new spending being proposed would greatly add to the problem.

It would be interesting if the arbiters of the election debate would forget about minutia, add up all the debt (on and off the budget) that will be coming due during the next decade, demand an answer from the two candidates about how they will deal with it— and not accept spin or evasion for an answer. Perhaps some of us don't want those questions asked, because, as Jack Nicholson said in A Few Good Men, “we can't handle the truth.”

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