Are Reporters Financially Illiterate? Fannie and Freddie Are Called “Government-Sponsored Enterprises” for a Reason

by Hans Bader on September 9, 2008 · 32 comments

Right now, the federal government, at a huge cost to taxpayers of perhaps $100 billion, is bailing out the two government-backed mortgage giants, Fannie Mae and Freddie Mac — the so-called GSEs.  “GSE” stands for Government-Sponsored Enterprise.  But some reporters are financially-illiterate, because if you point out the obvious — that the GSEs are going to cost taxpayers billions — reporters will condescendingly “correct” what you said, by insisting that they are completely “private sector” entities (false) that have yet to cost taxpayers a dime (false).   (Back in July, the predicted cost to taxpayers of a bailout was already over $25 billion, according to the Congressional Budget Office.  The cost could be up to $300 billion.  Moreover, the GSEs already receive an estimated $10 billion a year in hidden taxpayer subsidies).

CEI has been predicting for years that taxpayers would be on the hook if the GSEs weren’t reined in, and has long advocated reforms of their risky practices, but Fannie Mae paid off Congress (and bullied its critics) to prevent any reform.  (Incredibly, Fannie’s executives, who engaged in Enron-style accounting fraud, continue to lecture their critics about fiscal responsibility, blaming all their problems on the banking officials and free-market ideologues who blew the whistle on them for gambling at taxpayer expense.  I earlier wrote about this in the Washington Post.)

As John Berlau earlier noted, “Fannie and Freddie . . . were never really private in the first place. Fannie was created as the government agency the Federal National Mortgage Association in 1938 and spun off as a government-sponsored enterprise (GSE) in 1968. Freddie was created as a sister GSE two years later.  But even though they had private shareholders, they always retained government privileges. The President still appointed some of their board members, they were exempt from state and local taxes, and, importantly, they each had lines of credit with the Treasury. Though these lines were ‘only’ $2 billion, CEI President Fred Smith presciently warned at a Congressional hearing back in 2000 that ‘as long as the pipeline is there, it is like it is very expandable. … It could be $200 billion tomorrow.’ (The transcript is here. Fred’s statement, in response to questioning by Rep. Carolyn Maloney, appears on page 193.)  Fred also testified about the inherent dangers of the privatization of profit and socialization of loss in the Fannie-Freddie model. He described the GSEs as ‘strange organizations, neither private sector fish nor political sector fowl and said that ‘as a result, no one is quite sure how these entities should be evaluated or held accountable.’”

Taxpayers have subsidized the GSEs over the years, both directly (through subsidized lines of credit) and indirectly (by allowing the GSEs to borrow money at lower rates than they would otherwise have to pay, based on the implicit assumption by investors that the taxpayers would bail out the GSEs if they ever ran out of money).  Now, the Congress, in authorizing a bailout of the GSEs, has essentially given the government a blank checkat taxpayers’ expense.

Many reporters are so ideologically invested in depicting the mortgage crisis as the result of a lack of government involvement that they simply cannot accept the reality that Government-Sponsored Enterprises were at the root of the problem.  Government meddling, along with federal regulatory pressure on lenders to promote “affordable housing” and “diversity,” helped erode traditional lending standards, resulting in more risky mortgage loans to irresponsible people with bad credit (as some longtime supporters of federal meddling now admit).

Floyd R. Turbo September 9, 2008 at 7:05 am

As usual, we taxpayers are screwed. And screwed. And screwed again, for the umpteenth time. Will we ever learn? Apparently not. Guv'mint ain't necessarily the answer, folks. Can it get more obvious? Reagan was SO right. Guv'mint is so often the PROBLEM. And we elected the guys/gals that made it so. For DECADES.

KungPow September 9, 2008 at 7:15 am

Clearly Palin is way ahead of her cretin critics. Her "gaffe" is their ignorance.

Jim September 9, 2008 at 7:29 am

They are private when showing privates, but government sponsored when there are losses. Sweet deal.

Jim September 9, 2008 at 7:30 am

That's profits- not privates.

Cory September 9, 2008 at 7:44 am

Thank you for this! I hope it gets the coverage it is due.

dana September 9, 2008 at 8:08 am

This agency was and is a mess. Led by many liberal, democrats and financed in part (and now in whole) by the taxpayers, it is another government blackhole. And Obama has his stench all around it. Top advisors were running the organization, throwing money his way and squelching any attempts to reform. I wonder how long it will be before the mainstream media points this out? *crickets*

Kris September 9, 2008 at 8:30 am

The creep of socialism is ever present. We're going to need to come together to express our collective outrage. McCain and Palin have already release a joint statement detailing once again their promise to reign in such fiscally irresponsible program such as these.The WSJ has it all in black and white. Easy to read and easy to understand. We need REAL change – something only McCain and Palin will bring this election cycle:…..

kris September 9, 2008 at 8:31 am

The creep of socialism is ever present. We're going to need to come together to express our collective outrage. McCain and Palin have already release a joint statement detailing once again their promise to reign in such fiscally irresponsible program such as these.The WSJ has it all in black and white. Easy to read and easy to understand. We need REAL change – something only McCain and Palin will bring this election cycle:…..

gp September 9, 2008 at 8:44 am

"Are Reporters Financially Illiterate?" Hell yes! And they know even less about science, engineering, and math in general. Worst of all, if you notify them about their errors, they rarely post corrections.

Andrea September 9, 2008 at 9:49 am

It is ridiculous to think that McCain is interested in anything about the Presidency except the Commander in Chief post. He has repeatedly said that economics aren't his strong point, and has made it perfectly clear that he will dependon his Democratic advisors to draft policies. Palin is a fool, if for no other reason than she tied herself to his legacy.4 more years of Bush isn't change.

Andy September 9, 2008 at 10:10 am

I think they're anything but private when showing privates.

Michael September 9, 2008 at 10:38 am

This seems to be more of a failure to communicate than anything else. I have yet to hear a reporter claim that the bailout will not cost taxpayers any money (and your link does not direct to an example). When they claim that Fannie and Freddie do not cost the taxpayers money, reporters are referring to the period before the buyout, when Mae and Mac were supposedly acting as private enterprises (its debatable how much they indirectly cost taxpayers at that period in time – note: Michelle Malkin is not the best source on which to base you $10 billion claim). Palin's comments were unclear as to whether she was referring to the period before or after the buyout. If she was referring to the period after, she is absolutely correct. If she is referring to the period before, her assertion is a bit shakey, although not necessarily false. If she was implying that they were government agencies the way FEMA is a gov't agency, then there might be grounds to question her knowledge of the subject.

jdc September 10, 2008 at 12:31 am

The "blackhole" is American politics. Do you really think it matters who is in the Whitehouse or congress, for that matter anywhere in the political arena of this country? They are all playing with the same broken toys in the same sandbox and not a one of them are going to "change" anything about it. Why would they? We Americans keep accepting whatever they do and saying "Oh well, maybe next time". It is so true that common sense is un-common.

NowTell That September 10, 2008 at 7:42 am

We're the most TAXED People in the free world. Upon their Billion dollar a day WAR, now we are REQUIRED to pay for their CORRUPTION? A DEBT of $100 Billion plus to cover the tolling debt of Freddie and Frannie…is not only on our backs but the backs of our children and grand-children. This is FINANCIAL GENOCIDE.

jdc September 11, 2008 at 11:45 pm

I have a great idea! How about the IRS seizes the assets of the multi-billion dollar companies, some of the richest this world has ever seen, who have not paid taxes since 1998 and use the revenue from those sales to pay off Freddie and Fannie? I think that would be fair to all the people who pay more than their share of taxes already. Why should we carry the burden when we don't make the bad business decisions? Someone made money on this deal, lets find out who.

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