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Bush and the Economy or Beating a Dead Horse

Paul Kiesel — Tue, 23 Dec 2008 19:20:47 GMT

The New York Times published an article Sunday that broadly examines President Bush's role in our current economic turmoil (how Mr. Bush and his administration held the country's hand and led us down this disatrous and failed economic path).

The article is well written and very informative, however, it oversimplifies the problem and fulfills the desire of providing a face to the problem, which, in many instances, the general population craves in order to "justifiably" place blame: Mr. Bush's and the Bush administration's failed domestic/economic policy brought us to the economic plights of 2008. There is more substance to the country's economic problem than that simplified thesis (and I may have even simplified the thesis of the Times article, incidentally), more because, as we'll shortly see, once Mr. Bush leaves office, the economic turmoil will persist well into 2010.

If one chooses to research the matter further (or has the time to browse through any one of my blogs from May-July, 2008, maybe even using the Times article as a jumping-off point), he or she will quickly discover that Mr. Bush and his administration's ignorance exacerbated the problem, but that it was propelled long ago in securities deregulation legislation.

Below is the aforementioned New York Times article:

The Reckoning

White House Philosophy Stoked Mortgage Bonfire

By JO BECKER, SHERYL GAY STOLBERG and STEPHEN LABATON

“We can put light where there’s darkness, and hope where there’s despondency in this country. And part of it is working together as a nation to encourage folks to own their own home.” — President Bush, Oct. 15, 2002

WASHINGTON — The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, “scared the hell out of everybody.”

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

“How,” he wondered aloud, “did we get here?”

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

There are plenty of culprits, like lenders who peddled easy credit, consumers who took on mortgages they could not afford and Wall Street chieftains who loaded up on mortgage-backed securities without regard to the risk.

But the story of how we got here is partly one of Mr. Bush’s own making, according to a review of his tenure that included interviews with dozens of current and former administration officials.

From his earliest days in office, Mr. Bush paired his belief that Americans do best when they own their own home with his conviction that markets do best when let alone.

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Mr. Bush did foresee the danger posed by Fannie Mae and Freddie Mac, the government-sponsored mortgage finance giants. The president spent years pushing a recalcitrant Congress to toughen regulation of the companies, but was unwilling to compromise when his former Treasury secretary wanted to cut a deal. And the regulator Mr. Bush chose to oversee them — an old prep school buddy — pronounced the companies sound even as they headed toward insolvency.

As early as 2006, top advisers to Mr. Bush dismissed warnings from people inside and outside the White House that housing prices were inflated and that a foreclosure crisis was looming. And when the economy deteriorated, Mr. Bush and his team misdiagnosed the reasons and scope of the downturn; as recently as February, for example, Mr. Bush was still calling it a “rough patch.”

The result was a series of piecemeal policy prescriptions that lagged behind the escalating crisis.

“There is no question we did not recognize the severity of the problems,” said Al Hubbard, Mr. Bush’s former chief economics adviser, who left the White House in December 2007. “Had we, we would have attacked them.”

Looking back, Keith B. Hennessey, Mr. Bush’s current chief economics adviser, says he and his colleagues did the best they could “with the information we had at the time.” But Mr. Hennessey did say he regretted that the administration did not pay more heed to the dangers of easy lending practices. And both Mr. Paulson and his predecessor, John W. Snow, say the housing push went too far.

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

For much of the Bush presidency, the White House was preoccupied by terrorism and war; on the economic front, its pressing concerns were cutting taxes and privatizing Social Security. The housing market was a bright spot: ever-rising home values kept the economy humming, as owners drew down on their equity to buy consumer goods and pack their children off to college.

Lawrence B. Lindsey, Mr. Bush’s first chief economics adviser, said there was little impetus to raise alarms about the proliferation of easy credit that was helping Mr. Bush meet housing goals.

“No one wanted to stop that bubble,” Mr. Lindsey said. “It would have conflicted with the president’s own policies.”

Today, millions of Americans are facing foreclosure, homeownership rates are virtually no higher than when Mr. Bush took office, Fannie and Freddie are in a government conservatorship, and the bailout cost to taxpayers could run in the trillions.

As the economy has shed jobs — 533,000 last month alone — and his party has been punished by irate voters, the weakened president has granted his Treasury secretary extraordinary leeway in managing the crisis.

Never once, Mr. Paulson said in a recent interview, has Mr. Bush overruled him. “I’ve got a boss,” he explained, who “understands that when you’re dealing with something as unprecedented and fast-moving as this we need to have a different operating style.”

Mr. Paulson and other senior advisers to Mr. Bush say the administration has responded well to the turmoil, demonstrating flexibility under difficult circumstances. “There is not any playbook,” Mr. Paulson said.

The president declined to be interviewed for this article. But in recent weeks Mr. Bush has shared his views of how the nation came to the brink of economic disaster. He cites corporate greed and market excesses fueled by a flood of foreign cash — “Wall Street got drunk,” he has said — and the policies of past administrations. He blames Congress for failing to reform Fannie and Freddie. Last week, Fox News asked Mr. Bush if he was worried about being the Herbert Hoover of the 21st century.

“No,” Mr. Bush replied. “I will be known as somebody who saw a problem and put the chips on the table to prevent the economy from collapsing.”

But in private moments, aides say, the president is looking inward. During a recent ride aboard Marine One, the presidential helicopter, Mr. Bush sounded a reflective note.

“We absolutely wanted to increase homeownership,” Tony Fratto, his deputy press secretary, recalled him saying. “But we never wanted lenders to make bad decisions.”

A Policy Gone Awry

Darrin West could not believe it. The president of the United States was standing in his living room.

It was June 17, 2002, a day Mr. West recalls as “the highlight of my life.” Mr. Bush, in Atlanta to unveil a plan to increase the number of minority homeowners by 5.5 million, was touring Park Place South, a development of starter homes in a neighborhood once marked by blight and crime.

Mr. West had patrolled there as a police officer, and now he was the proud owner of a $130,000 town house, bought with an adjustable-rate mortgage and a $20,000 government loan as his down payment — just the sort of creative public-private financing Mr. Bush was promoting.

“Part of economic security,” Mr. Bush declared that day, “is owning your own home.”

A lot has changed since then. Mr. West, beset by personal problems, left Atlanta. Unable to sell his home for what he owed, he said, he gave it back to the bank last year. Like other communities across America, Park Place South has been hit with a foreclosure crisis affecting at least 10 percent of its 232 homes, according to Masharn Wilson, a developer who led Mr. Bush’s tour.

“I just don’t think what he envisioned was actually carried out,” she said.

Park Place South is, in microcosm, the story of a well-intentioned policy gone awry. Advocating homeownership is hardly novel; the Clinton administration did it, too. For Mr. Bush, it was part of his vision of an “ownership society,” in which Americans would rely less on the government for health care, retirement and shelter. It was also good politics, a way to court black and Hispanic voters.

But for much of Mr. Bush’s tenure, government statistics show, incomes for most families remained relatively stagnant while housing prices skyrocketed. That put homeownership increasingly out of reach for first-time buyers like Mr. West.

So Mr. Bush had to, in his words, “use the mighty muscle of the federal government” to meet his goal. He proposed affordable housing tax incentives. He insisted that Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.

Concerned that down payments were a barrier, Mr. Bush persuaded Congress to spend up to $200 million a year to help first-time buyers with down payments and closing costs.

And he pushed to allow first-time buyers to qualify for federally insured mortgages with no money down. Republican Congressional leaders and some housing advocates balked, arguing that homeowners with no stake in their investments would be more prone to walk away, as Mr. West did. Many economic experts, including some in the White House, now share that view.

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

“This administration made decisions that allowed the free market to operate as a barroom brawl instead of a prize fight,” said L. William Seidman, who advised Republican presidents and led the savings and loan bailout in the 1990s. “To make the market work well, you have to have a lot of rules.”

But Mr. Bush populated the financial system’s alphabet soup of oversight agencies with people who, like him, wanted fewer rules, not more.

Like Minds on Laissez-Faire

The president’s first chairman of the Securities and Exchange Commission promised a “kinder, gentler” agency. The second was pushed out amid industry complaints that he was too aggressive. Under its current leader, the agency failed to police the catastrophic decisions that toppled the investment bank Bear Stearns and contributed to the current crisis, according to a recent inspector general’s report.

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

The president did push rules aimed at forcing lenders to more clearly explain loan terms. But the White House shelved them in 2004, after industry-friendly members of Congress threatened to block confirmation of his new housing secretary.

In the 2004 election cycle, mortgage bankers and brokers poured nearly $847,000 into Mr. Bush’s re-election campaign, more than triple their contributions in 2000, according to the nonpartisan Center for Responsive Politics. The administration did not finalize the new rules until last month.

Among the Republican Party’s top 10 donors in 2004 was Roland Arnall. He founded Ameriquest, then the nation’s largest lender in the subprime market, which focuses on less creditworthy borrowers. In July 2005, the company agreed to set aside $325 million to settle allegations in 30 states that it had preyed on borrowers with hidden fees and ballooning payments. It was an early signal that deceptive lending practices, which would later set off a wave of foreclosures, were widespread.

Andrew H. Card Jr., Mr. Bush’s former chief of staff, said White House aides discussed Ameriquest’s troubles, though not what they might portend for the economy. Mr. Bush had just nominated Mr. Arnall as his ambassador to the Netherlands, and the White House was primarily concerned with making sure he would be confirmed.

“Maybe I was asleep at the switch,” Mr. Card said in an interview.

Brian Montgomery, the Federal Housing Administration commissioner, understood the significance. His agency insures home loans, traditionally for the same low-income minority borrowers Mr. Bush wanted to help. When he arrived in June 2005, he was shocked to find those customers had been lured away by the “fool’s gold” of subprime loans. The Ameriquest settlement, he said, reinforced his concern that the industry was exploiting borrowers.

In December 2005, Mr. Montgomery drafted a memo and brought it to the White House. “I don’t think this is what the president had in mind here,” he recalled telling Ryan Streeter, then the president’s chief housing policy analyst.

It was an opportunity to address the risky subprime lending practices head on. But that was never seriously discussed. More senior aides, like Karl Rove, Mr. Bush’s chief political strategist, were wary of overly regulating an industry that, Mr. Rove said in an interview, provided “a valuable service to people who could not otherwise get credit.” While he had some concerns about the industry’s practices, he said, “it did provide an opportunity for people, a lot of whom are still in their houses today.”

The White House pursued a narrower plan offered by Mr. Montgomery that would have allowed the F.H.A. to loosen standards so it could lure back subprime borrowers by insuring similar, but safer, loans. It passed the House but died in the Senate, where Republican senators feared that the agency would merely be mimicking the private sector’s risky practices — a view Mr. Rove said he shared.

Looking back at the episode, Mr. Montgomery broke down in tears. While he acknowledged that the bill did not get to the root of the problem, he said he would “go to my grave believing” that at least some homeowners might have been spared foreclosure.

Today, administration officials say it is fair to ask whether Mr. Bush’s ownership push backfired. Mr. Paulson said the administration, like others before it, “over-incented housing.” Mr. Hennessey put it this way: “I would not say too much emphasis on expanding homeownership. I would say not enough early focus on easy lending practices.”

‘We Told You So’

Armando Falcon Jr. was preparing to take on a couple of giants.

A soft-spoken Texan, Mr. Falcon ran the Office of Federal Housing Enterprise Oversight, a tiny government agency that oversaw Fannie Mae and Freddie Mac, two pillars of the American housing industry. In February 2003, he was finishing a blockbuster report that warned the pillars could crumble.

Created by Congress, Fannie and Freddie — called G.S.E.’s, for government-sponsored entities — bought trillions of dollars’ worth of mortgages to hold or sell to investors as guaranteed securities. The companies were also Washington powerhouses, stuffing lawmakers’ campaign coffers and hiring bare-knuckled lobbyists.

Mr. Falcon’s report outlined a worst-case situation in which Fannie and Freddie could default on debt, setting off “contagious illiquidity in the market” — in other words, a financial meltdown. He also raised red flags about the companies’ soaring use of derivatives, the complex financial instruments that economic experts now blame for spreading the housing collapse.

Today, the White House cites that report — and its subsequent effort to better regulate Fannie and Freddie — as evidence that it foresaw the crisis and tried to avert it. Bush officials recently wrote up a talking points memo headlined “G.S.E.’s — We Told You So.”

But the back story is more complicated. To begin with, on the day Mr. Falcon issued his report, the White House tried to fire him.

At the time, Fannie and Freddie were allies in the president’s quest to drive up homeownership rates; Franklin D. Raines, then Fannie’s chief executive, has fond memories of visiting Mr. Bush in the Oval Office and flying aboard Air Force One to a housing event. “They loved us,” he said.

So when Mr. Falcon refused to deep-six his report, Mr. Raines took his complaints to top Treasury officials and the White House. “I’m going to do what I need to do to defend my company and my position,” Mr. Raines told Mr. Falcon.

Days later, as Mr. Falcon was in New York preparing to deliver a speech about his findings, his cellphone rang. It was the White House personnel office, he said, telling him he was about to be unemployed.

His warnings were buried in the next day’s news coverage, trumped by the White House announcement that Mr. Bush would replace Mr. Falcon, a Democrat appointed by Bill Clinton, with Mark C. Brickell, a leader in the derivatives industry that Mr. Falcon’s report had flagged.

It was not until 2003, when Freddie became embroiled in an accounting scandal, that the White House took on the companies in earnest. Mr. Bush decided to quit the long-standing practice of rewarding supporters with high-paying appointments to the companies’ boards — “political plums,” in Mr. Rove’s words. He also withdrew Mr. Brickell’s nomination and threw his support behind Mr. Falcon, beginning an intense effort to give his little regulatory agency more power.

Mr. Falcon lacked explicit authority to limit the size of the companies’ mammoth investment portfolios, or tell them how much capital they needed to guard against losses. White House officials wanted that to change. They also wanted the power to put the companies into receivership, hoping that would end what Mr. Card, the former chief of staff, called “the myth of government backing,” which gave the companies a competitive edge because investors assumed the government would not let them fail.

By the spring of 2005 a deal with Congress seemed within reach, Mr. Snow, the former Treasury secretary, said in an interview.

Michael G. Oxley, an Ohio Republican and then-chairman of the House Financial Services Committee, had produced what Mr. Snow viewed as “a pretty darned good bill,” a watered-down version of what the president sought. But at the urging of Mr. Card and the White House economics team, the president decided to hold out for a tougher bill in the Senate.

Mr. Card said he feared that Mr. Snow was “more interested in the deal than the result.” When the bill passed the House, the president issued a statement opposing it, effectively killing any chance of compromise. Mr. Oxley was furious.

“The problem with those guys at the White House, they had all the answers and they didn’t think they had to listen to anyone, including the Treasury secretary,” Mr. Oxley said in a recent interview. “They were driving the ideological train. He was in the caboose, and they were in the engine room.”

Mr. Card and Mr. Hennessey said they had no regrets. They are convinced, Mr. Hennessey said, that the Oxley bill would have produced “the worst of all possible outcomes,” the illusion of reform without the substance.

Still, some former White House and Treasury officials continue to debate whether Mr. Bush’s all-or-nothing approach scuttled a measure that, while imperfect, might have given an aggressive regulator enough power to keep the companies from failing.

Mr. Snow, for one, calls Mr. Oxley “a hero,” adding, “He saw the need to move. It didn’t get done. And it’s too bad, because I think if it had, I think we could well have avoided a big contributor to the current crisis.”

Unheeded Warnings

Jason Thomas had a nagging feeling.

The New Century Financial Corporation, a huge subprime lender whose mortgages were bundled into securities sold around the world, was headed for bankruptcy in March 2007. Mr. Thomas, an economic analyst for President Bush, was responsible for determining whether it was a hint of things to come.

At 29, Mr. Thomas had followed a fast-track career path that took him from a Buffalo meatpacking plant, where he worked as a statistician, to the White House. He was seen as a whiz kid, “a brilliant guy,” his former boss, Mr. Hubbard, says.

As Mr. Thomas began digging into New Century’s failure that spring, he became fixated on a particular statistic, the rent-to-own ratio.

Typically, as home prices increase, rental costs rise proportionally. But Mr. Thomas sent charts to top White House and Treasury officials showing that the monthly cost of owning far outpaced the cost to rent. To Mr. Thomas, it was a sign that housing prices were wildly inflated and bound to plunge, a condition that could set off a foreclosure crisis as conventional and subprime borrowers with little equity found they owed more than their houses were worth.

It was not the Bush team’s first warning. The previous year, Mr. Lindsey, the former chief economics adviser, returned to the White House to tell his old colleagues that housing prices were headed for a crash. But housing values are hard to evaluate, and Mr. Lindsey had a reputation as a market pessimist, said Mr. Hubbard, adding, “I thought, ‘He’s always a bear.’ ”

In retrospect, Mr. Hubbard said, Mr. Lindsey was “absolutely right,” and Mr. Thomas’s charts “should have been a signal.”

Instead, the prevailing view at the White House was that the problems in the housing market were limited to subprime borrowers unable to make their payments as their adjustable mortgages reset to higher rates. That belief was shared by Mr. Bush’s new Treasury secretary, Mr. Paulson.

Mr. Paulson, a former chairman of the Wall Street firm Goldman Sachs, had been given unusual power; he had accepted the job only after the president guaranteed him that Treasury, not the White House, would have the dominant role in shaping economic policy. That shift merely continued an imbalance of power that stifled robust policy debate, several former Bush aides say.

Throughout the spring of 2007, Mr. Paulson declared that “the housing market is at or near the bottom,” with the problem “largely contained.” That position underscored nearly every action the Bush administration took in the ensuing months as it offered one limited response after another.

By that August, the problems had spread beyond New Century. Credit was tightening, amid questions about how heavily banks were invested in securities linked to mortgages. Still, Mr. Bush predicted that the turmoil would resolve itself with a “soft landing.”

The plan Mr. Bush announced on Aug. 31 reflected that belief. Called “F.H.A. Secure,” it aimed to help about 80,000 homeowners refinance their loans. Mr. Montgomery, the housing commissioner, said that he knew the modest program was not enough — the White House later expanded the agency’s rescue role — and that he would be “flying the plane and fixing it at the same time.”

That fall, Representative Rahm Emanuel, a leading Democrat, former investment banker and now the incoming chief of staff to President-elect Barack Obama, warned the White House it was not doing enough. He said he told Joshua B. Bolten, Mr. Bush’s chief of staff, and Mr. Paulson in a series of phone calls that the credit crisis would get “deep and serious” and that the only answer was big, internationally coordinated government intervention.

“You got to strangle this thing and suffocate it,” he recalled saying.

Instead, Mr. Bush developed Hope Now, a voluntary public-private partnership to help struggling homeowners refinance loans. And he worked with Congress to pass a stimulus package that sent taxpayers $150 billion in tax rebates.

In a speech to the Economic Club of New York in March 2008, he cautioned against Washington’s temptation “to say that anything short of a massive government intervention in the housing market amounts to inaction,” adding that government action could make it harder for the markets to recover.

Dominoes Start to Fall

Within days, Bear Sterns collapsed, prompting the Federal Reserve to engineer a hasty sale. Some economic experts, including Timothy F. Geithner, the president of the New York Federal Reserve Bank (and Mr. Obama’s choice for Treasury secretary) feared that Fannie Mae and Freddie Mac could be the next to fall.

Mr. Bush was still leaning on Congress to revamp the tiny agency that oversaw the two companies, and had acceded to Mr. Paulson’s request for the negotiating room that he had denied Mr. Snow. Still, there was no deal.

Over the previous two years, the White House had effectively set the agency adrift. Mr. Falcon left in 2005 and was replaced by a temporary director, who was in turn replaced by James B. Lockhart, a friend of Mr. Bush from their days at Andover, and a former deputy commissioner of the Social Security Administration who had once run a software company.

On Mr. Lockhart’s watch, both Freddie and Fannie had plunged into the riskiest part of the market, gobbling up more than $400 billion in subprime and other alternative mortgages. With the companies on precarious footing, Mr. Geithner had been advocating that the administration seize them or take other steps to reassure the market that the government would back their debt, according to two people with direct knowledge of his views.

In an Oval Office meeting on March 17, however, Mr. Paulson barely mentioned the idea, according to several people present. He wanted to use the troubled companies to unlock the frozen credit market by allowing Fannie and Freddie to buy more mortgage-backed securities from overburdened banks. To that end, Mr. Lockhart’s office planned to lift restraints on the companies’ huge portfolios — a decision derided by former White House and Treasury officials who had worked so hard to limit them.

But Mr. Paulson told Mr. Bush the companies would shore themselves up later by raising more capital.

“Can they?” Mr. Bush asked.

“We’re hoping so,” the Treasury secretary replied.

That turned out to be incorrect, and did not surprise Mr. Thomas, the Bush economic adviser. Throughout that spring and summer, he warned the White House and Treasury that, in the stark words of one e-mail message, “Freddie Mac is in trouble.” And Mr. Lockhart, he charged, was allowing the company to cover up its insolvency with dubious accounting maneuvers.

But Mr. Lockhart continued to offer reassurances. In a July appearance on CNBC, he declared that the companies were well managed and “worsts were not coming to worst.” An infuriated Mr. Thomas sent a fresh round of e-mail messages accusing Mr. Lockhart of “pimping for the stock prices of the undercapitalized firms he regulates.”

Mr. Lockhart defended himself, insisting in an interview that he was aware of the companies’ vulnerabilities, but did not want to rattle markets.

“A regulator,” he said, “does not air dirty laundry in public.”

Soon afterward, the companies’ stocks lost half their value in a single day, prompting Congress to quickly give Mr. Paulson the power to spend $200 billion to prop them up and to finally pass Mr. Bush’s long-sought reform bill, but it was too late. In September, the government seized control of Freddie Mac and Fannie Mae.

In an interview, Mr. Paulson said the administration had no justification to take over the companies any sooner. But Mr. Falcon disagreed: “They absolutely could have if they had thought there was a real danger.”

By Sept. 18, when Mr. Bush and his team had their fateful meeting in the Roosevelt Room after the failure of Lehman Brothers and the emergency rescue of A.I.G., Mr. Paulson was warning of an economic calamity greater than the Great Depression. Suddenly, historic government intervention seemed the only option. When Mr. Paulson spelled out what would become a $700 billion plan to rescue the nation’s banking system, the president did not hesitate.

“Is that enough?” Mr. Bush asked.

“It’s a lot,” the Treasury secretary recalled replying. “It will make a difference.” And in any event, he told Mr. Bush, “I don’t think we can get more.”

As the meeting wrapped up, a handful of aides retreated to the White House Situation Room to call Vice President Dick Cheney in Florida, where he was attending a fund-raiser. Mr. Cheney had long played a leading role in economic policy, though housing was not a primary interest, and like Mr. Bush he had a deep aversion to government intervention in the market. Nonetheless, he backed the bailout, convinced that too many Americans would suffer if Washington did nothing.

Mr. Bush typically darts out of such meetings quickly. But this time, he lingered, patting people on the back and trying to soothe his downcast staff. “During times of adversity, he bucks everybody up,” Mr. Paulson said.

It was not the end of the failures or government interventions; the administration has since stepped in to rescue Citigroup and, just last week, the Detroit automakers. With 31 days left in office, Mr. Bush says he will leave it to historians to analyze “what went right and what went wrong,” as he put it in a speech last week to the American Enterprise Institute.

Mr. Bush said he was too focused on the present to do much looking back.

“It turns out,” he said, “this isn’t one of the presidencies where you ride off into the sunset, you know, kind of waving goodbye.”

Originally posted at InjuryBoard by Paul Kiesel

Interim Head of Government Bailouts, Neel Kashkari, Called a "Chump" by One Congressman, While Another Compares Him to Mel Gibson

Paul Kiesel — Fri, 14 Nov 2008 19:09:16 GMT

Neel Kashkari, the interim head of the Troubled Asset Relief Program (aka the Treasury Department's $700 billion financial rescue plan or TARP), came under heavy fire today at a House Oversight and Government Reform subcommittee hearing, after Maryland Democrat Elijah Cummings got his chance to ask Kashkari questions relating to an expanded $154 billion that was given to American International Group Inc. (AIG) this week, even though AIG still plans on setting aside $503 million in compensation for executives.

Cummings asked Kashkari, "I'm just wondering how you feel about an AIG giving $503 million worth of bonuses on the one hand, and accepting $154 billion from hard-working taxpayers? [And] what really bothers me is all these other people lining up. They say, well, is Kashkari a chump?"

Kashkari responded by telling the panel he was "outraged" that AIG will do this, but he then said he recently learned that AIG has set aside money in order to eliminate an incentive to leave the insurer.

"I'm not defending it," Kashkari said. But, in actuality, he had done just that.

After Cummings prodded Kashkari further, and laid a minor guilt-trip on him, explaining that families, due to the economic situations that many in the country currently face, will "probably be sitting under the Christmas tree with no presents" this year due to his decisions inadvertently determining consumer behavior, Dennis Kucinich, the chairman of this subcommittee, repeatedly interrupted the Treasury official during the more than two-hour session.

Kucinich harshly criticized Treasury Secretary Henry Paulson's decision this week to abandon the TARP's original intent of purchasing toxic mortgage assets from financial firms.

"The secretary just essentially took some scissors and cut it out and threw it away [. . .] Maybe this is some kind of game to some people in the administration," Kucinich said. "They're [Bush's Administration] on their way out of office and they just feel they can do whatever they want."

Is Kashkari a Chump

Kashkari reitterated to the subcommittee that his department isn't in charge of bank oversight, and that financial regulators are more concerned with bank using this capital to increase lending.

The top Republican on the subcommittee, Darell Issa (R-CA), chided Kashkari saying that his efforts have done little to help families stay in their homes. "It's very clear that the Treasury cannot and will not make the effort to keep people in their homes."

After further accusations by some other members of the committee, California Republican Brian Bilbray, with an absurd veneration, compared Kashkari to Mel Gibson's character from Braveheart, "I guess you sort of got a taste of how Mel Gibson felt in the last scenes of 'Braveheart' [. . .] You're probably the best spokesman the administration has [and] you've come across with more credibility than anyone else that I've heard."

Originally posted at InjuryBoard by Paul Kiesel

"The Four" Who Helped Usher in the Economic Crisis

Paul Kiesel — Mon, 13 Oct 2008 18:48:50 GMT

There were those that predicted the current economic, foreclosure, housing, and mortgage crisis (Paul Krugman, who incidentally just won the Nobel prize in economics, Robert Shiller, Dr. Nouriel Roubini) and then there were those other figures -- politicians, economists and conservative pundits -- who recklessly enabled or promoted the economic situation the U.S. faces today (see below).

Alan Greenspan (former Fed Chairman)

We now know that stronger regulation of derivatives would have done much to stem the current financial crisis, but Greenspan argued against that philosophy:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so," Mr. Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added. (New York Times, 10/8/08)

Phil Gramm (former Texas senator and economic adviser to John McCain)

From the New York Times: For more than two decades in Congress he argued that the forces of the market had to be freed from government interference. Just a year after the passage of Gramm- Leach-Bliley, he was largely responsible for another bill -- the Commodity Futures Modernization Act -- that clearly did contribute to the current crisis. That law unleashed the derivatives market and paved the way for banks to become more aggressive about investing in mortgages. As recently as this summer, he was still saying that the biggest problem facing the American economy was excessive regulation.

Chris Cox (Head of the SEC)

Cox, who is the current head of the SEC, helped put greater deregulation into effect, and as of last March, was saying the following:

"We have a good deal of comfort about the capital cushions at these firms at the moment."

Henry Paulson (Treasury Secretary)

"I have great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible." -- Treasury Secretary Henry Paulson on March 16, 2008

"There is little public policymakers can, or should, do to compensate for untenable financial decisions." -- Treasury Secretary Henry Paulson on July 8, 2008

From the New York Times: They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

Originally posted at InjuryBoard by Paul Kiesel

The Next Bailout: How Much Will It Cost?

Paul Kiesel — Tue, 07 Oct 2008 16:35:28 GMT

A few excellent points on the $700 billion "Rescue Package" have been made since President Bush signed it into law last Friday.

1. The plan does not recapitalize banks, it just buys their troubled assets.

2. It won't clean up the banks' balance sheets anytime soon (the $700 billion will be slowly allocated to banks, as determined by the Treasury Department and Congress).

3. Because of the two aforementioned points, there here will be an inevitable FIFTH bailout, and it's likely to occur before the end of the year (The four bailouts: Bear Stearns, Fannie Mae/Freddie Mac, AIG, and the "Hank Paulson" bailout plan).

The Los Angeles Times' Peter Viles reported on this looming problem yesterday in his L.A. Land Blog. Below are Edmund Phelps' (2006 Nobel Prize winner for economics) thoughts on the matter and Paul Krugman's assessment, who's a New York Times columnist. Both are two of the more erudite individuals on U.S. economic policy.

U.S. Treasury Secretary Henry Paulson's $700-billion plan to buy troubled assets from financial firms may not work because it doesn't recapitalize banks, said Edmund Phelps, winner of the 2006 Nobel Prize for economics.

“There are lots of reasons to think the Paulson plan won't succeed in cleaning up banks' balance sheets any time soon,” Phelps, an economics professor at Columbia University, said at a conference today in Washington. “It may aggravate the second problem banks have, which is that they're quasi-insolvent.” (L.A. Land Blog, 10/6/08)

Speaking at the same conference, New York Times columnist Paul Krugman agreed, saying the Paulson plan fails to recapitalize banks, and that another government intervention, to inject capital into the banking system, is probably inevitable.

Last Friday, Krugman questioned the just signed "Rescue Package" in a New York Times Opinion column, "Has the Bailout Already Failed," and then went on to write:

OK, I know that’s premature. And I place no weight at all on the fact that the Dow plunged after the vote.

But it is interesting that short-term Treasury yields are down — only 0.13% on one-month — suggesting that the flight to safety continues unabated. Against this, John Jansen reports some signs that money markets are unfreezing, slightly.

We’ll learn more next week. But I have a prediction: well before January 20, Congress will be asked to vote on bailout 2.0.

Only time will tell, but it looks like the portending by both Krugman and Phelps is likely to occur, as President Bush tried reassuring Americans today, telling them to give this current rescue package time to work. (The President's reassurances over the past seven and a half years always signal more troubling times ahead, whether it's in regards to Hurricane Katrina, Iraq, Afghanistan, the Mortgage Crisis, etc., etc.) This is also coming from a president who has not answered reporters' questions since August 6.

Originally posted at InjuryBoard by Paul Kiesel

Three Blind Mice: Bush, Bernanke and Paulson on the Economy

Paul Kiesel — Thu, 25 Sep 2008 15:53:40 GMT

How wrong were Bush, Bernanke and Paulson on the state of the economy over the past six months? Very wrong.

"Our policy in this administration -- laws shouldn't bail out lenders, laws shouldn't help speculators." -- President Bush on May 19, 2008

"There is little public policymakers can, or should, do to compensate for untenable financial decisions." -- Treasury Secretary Henry Paulson on July 8, 2008

"Our economy has continued growing, consumers are spending, business are investing, exports continue increasing and American productivity remains strong. We can have confidence in the long-term foundation of our economy [. . .] I think the system basically is sound. I truly do." -- President Bush on July 15, 2008

"I understand there's a lot of nervousness [. . .] The economy is growing. Productivity is high. Trade's up. People are working -- it's not as good as we'd like. And to the extent that we'll find weakness, we'll move." -- President Bush on July 15, 2008

"We will work our way through these financial storms [. . .] Freddie and Fannie are in no danger of failing." -- Fed Chairman Ben Bernanke on July 16, 2008

"Market intervention is a policy that's been undertaken a few times. I think it's something that should be done only rarely. But there may be conditions where markets are disorderly, where some temporary action might be justified [. . .] But I think the dollar in the long term depends really on the fundamentals, and it's up to us to get fundamentals right." -- Fed Chairman Ben Bernanke on July 16, 2008

Bush, Bernanke and Paulson: How did these guys not warn the public earlier? If they truly believed in these statements on the economy, they were completely wrong. If not, then the motives for statements like these are even more insidious.

It's not like all of these economic problems with regards to the housing market, inflation and Wall Street just started happening this year. The wheels were in motion for our current financial crisis years ago -- one could even say almost a decade ago, as a Republican-led Congress pushed for deregulation and, ultimately, got their way, which has proven to be the at the root of this problem: Nobody was regulating or overseeing the type of lending and banking that was taking place.

Also, nobody is looking at the sudden shift in the Bush Administration's economic policy. Bush, for months, had been against any type of government intervention into the "free markets." It wasn't until July, shortly after making inappropriate comments about the health of the economy at a private fundraiser and having it leaked onto the internet (thanks, YouTube), that Bush conceded and supported a housing bailout package. Now he's for rewarding the people that provided these loans with misleading language -- sometimes fraudulent language -- that has helped spur some of the highest foreclosure rates in modern history (TILA and other mortgage fraud have been rampant throughout the course of the subprime and option ARM lending boom).

Bernanke, since becoming the Fed chairman on February 1, 2006, largely ignored the signs that the economy was turning sour, however, at his defense, Greenspan didn't provide much help as he left his post; Greenspan himself ignored the signs and assessed the entire situation incorrectly (short term and long term -- particularly with housing).

And Paulson, well, he might have the most at stake with regards to the Wall Street Bailout package. Paulson's net worth was almost $700,000,000 before the markets started hemorrhaging over the summer. He has almost $500,000,000 tied up in the investment bank Goldman Sachs, where he was the CEO before he became the Treasury Secretary. Goldman Sachs' biggest competitor was Lehman Brothers. Lehman Brothers filed for Chapter 11 four days before a bailout package was announced. Lehman Brothers will not benefit from this bailout package. Lehman Brothers' assets are being broken up and sold to other investment banks like London based commercial and investment bank Barclays. Goldman Sachs no longer has Lehman Brothers to worry about. Also, Section 8 of the original bailout proposal gave Paulson the authority to disperse funds as he saw fit, and that his decisions may not be reviewed by any court of law.

Fortunately, Congress, led by strong bipartisan efforts (many Republicans were willing to work with Barney Frank, Chris Dodd, Jack Reed, and other congressional Democrats on amending the original Bush Bailout Plan, so troubled homeowners and other under represented parties benefitted from a rescue package, as well), has come to terms on a revised Wall Street Bailout plan. Now we'll just have to wait and see if Bush, Bernanke and Paulson waited too long to make a move and who benefits most from the bailout package.

Originally posted at InjuryBoard by Paul Kiesel

SEC Chairman Chris Cox: "Market Ripe for Fraud and Manipulation"

Paul Kiesel — Tue, 23 Sep 2008 14:15:15 GMT

SEC Chairman Chris Cox testified this morning at the Senate Banking Committee hearing in regards to the potential Wall Street Bailout plan that was proposed over the weekend. Cox said that his agency has more than 50 investigations open on subprime mortgage cases. However, Cox said that he's also trying to "ascertain" if anything illegal went on in the risky-mortgage market that contributed to the current crisis.

If Chris Cox was truly uncertain as to whether any illegal activity and lending was going on amongst Wall Street firms and mortgage lenders that led the way to the financial crisis, then why would he later say in his testimony, "This market is regulated by absolutely no one [. . .] It is a market ripe for fraud and manipulation."

The only thing that's left to ascertain is to pinpoint where this type of "illegal activity" originated, and why it was allowed to spiral as out of control as it did.

Interestingly, Cox does mention credit-default swaps (CDS). CDSs are unusual or creative financial instruments where the risk of default on credit is passed among lenders and investors, much like the game Hot Potato. This type of creative financial packaging became popular after the Gramm-Leach-Bliley bill gutted Glass-Steagall and the subsequent passage of the Commodity Futures Modernization Act. Cox believes, and is most certainly correct, that CDSs allowed a forum for the shorting of corporate debt without the oversight imposed on cash markets.

Unfortunately, Cox doesn't mention fraud or manipulation in mortgage documents like TILA forms or the presence of both in the Alt-A/Option ARM loan market. Fraudulent claims and ambiguous language were littered throughout Truth in Lending documents. For instance, whenever a loan failed to state that it was a negative amortizing loan -- when it was that type of loan -- it was in explicit violation of the Truth in Lending Act.

The reality is that the fraud and manipulation Cox is aware of, suspects, and/or turned his head away from could have been prevented: A Republican-led Congress chose in 2000 not to extend regulation to OTC derivatives markets. One of the most influential proponents of not regulating OTC derivatives was Alan Greenspan, then chairman of the Federal Reserve. Greenspan said, "OTC transactions in financial derivatives are not susceptible to - that is, easily influenced by - manipulation.” Nobody questioned Greenspan when he made this claim. Nobody questioned Greenspan when he said on October 9, 2006 that the housing market would soon rebound from its slight slump, "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out [. . .] There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over."

Without proper oversight, the people responsible for this mess were able to do and say whatever they felt looked and sounded good, whether their claims were accurate or a series of mistruths.

I think it's safe to say that the next time broad claims like Greenspan's, Ben Bernanke's, Hank Paulson's or anybody pushing a heavily deregulated industry goes unquestioned, consequences are likely to follow again.

Originally posted at InjuryBoard by Paul Kiesel

Foreclosure Aid to be Included in Bush Bailout Plan

Paul Kiesel — Mon, 22 Sep 2008 19:57:35 GMT

House Representative Barney Frank, chairman of the House Financial Services Committee, who has been pushing for foreclosure aid to be added to the Bush Bailout Plan all weekend, reports that Treasury Secretary Paulson has agreed on a foreclosure piece proposed by congressional Democrats.

The administration has agreed to add foreclosure relief options and aid to homeowners who face foreclosure (or who will be facing foreclosure next year due to option ARM loan interest rate resets) on their mortgages.

The Los Angeles Times reports, "Democrats have insisted that, while emergency help for the financial system -- potentially the biggest government bailout in U.S. history -- must be approved quickly, the measure must also include help for ordinary Americans, including those threatened with loss of their homes," (Los Angeles Times, 9/23/08).

Senate Democrats, including chairman of the Senate Banking Committee, Chris Dodd, are also calling for the federal government to limit compensation packages given to their top executives to be no more than that of the highest paid government official.

Seeing as how the executives on Wall Street, without any interference from the Bush Administration, ushered the country into this financial chaos due to irresponsible lending among a bevy of other fiscal misbehaviors, and who will be benefiting the most from Bush's proposed bailout, it would only make sense that the people who are holding these bad loans (many of who were misled about the details of their loans: i.e. TILA fraud), should receive some notice and aid to prevent further economic turmoil for the average American.

As more details of Bush's Bailout are revealed and revisions get made, it becomes frighteningly obvious that Wall Street executives, like recently ousted Freddie Mac CEO Richard Syron, knew exactly what they were doing when they were making record profits, writing bad loans, and selling collateralized debts to investors in Costco-like wholesale numbers with no regard to whether they could make good on the CDOs they were selling: that if their dubious business philosophy failed, the government would step in and bail them out, passing the bill on to taxpayers and future generations.

Originally posted at InjuryBoard by Paul Kiesel

32 Problems with the Wall Street Bailout

Paul Kiesel — Mon, 22 Sep 2008 19:28:01 GMT

Actually, there may be more or less than 32 problems with Bush's Wall Street Bailout proposal, but there is no greater problem than the 32 words present in Section 8 of the Bush Administration's legislation.

Section 8: Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

Based on the track record of the Bush Administration (9/11, Afghanistan, Iraq, Hurricane Katrina, the events that led up to Wall Street's demise, past proposals to privatize social security, etc., etc.), to not question their authority or provide oversight to how the billions are spent by Treasury Secretary Paulson (or the Economic Czar that Bush proposes; Section 8 also cites "unfettered authority" that would be given to Paulson), or to review the decisions made by the ones in charge of this bailout, would be as irresponsible as the Wall Street CEOs who acted like Tom Cruise's character, Joel Goodsen, from Risky Business when his parents left town, the moment Phil Gramm, John McCain and their buddies provided and voted on the legislation that deregulated the banking and lending industries.

Section 8, as it is currently written (this could be revised after Congress reviews the proposed bill and adds its provisions), is one of the more transformative sentences of economic policy in U.S. history. It transfers a significant amount of power to the Executive Branch, while occluding any possibility for oversight, and offering no guarantees in return. This is amazing considering the fact that Bush was explicit in his speech last Friday morning, when he discussed the need for more transparency and more oversight throughout Wall Street. All Section 8 does, and reaffirms, is that the Bush Administration, in this version of the bailout plan, wants nothing to do with transparency, and wants to have uncontested control of how the $700,000,000,000 bailout funds are dispersed before the administration comes to a wheezing halt on January 20, 2009.

However, over in the Senate, Democratic Connecticut Senator Chris Dodd is coming up with a bailout bill of his own. Dodd's bill does not include anything similar to Section 8.

Originally posted at InjuryBoard by Paul Kiesel

What's Missing From Bush's Bailout Plan? For Starters, the Word Bailout...

Paul Kiesel — Fri, 19 Sep 2008 19:36:27 GMT

It's finally happened. The federal government, much to the chagrin and support of Congressional leaders, stepped in this morning and has written a blank check for Wall Street's blunders.

In his speech, President Bush did not use the word "bailout" once to describe a plan that is nothing short of a bailout. Treasury Secretary Paulson, Fed Chairman Bernanke and SEC Chairman Cox briefed leaders on Capital Hill, and urged Congress to pass legislation approving the federal government's purchase of illiquid assets, such as troubled mortgages (bad loans, like subprime and option ARM loans; the latter loans are about to reset early next year and cause more financial tumult, but now it will be at the expense of taxpayers instead of Wall Street CEOs and investors), from banks and other financial institutions.

CNBC has reported that, "The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion-dollars (this figure does not include the more than $200 billion already at stake from Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, etc., etc.) and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.

The copious amount of illiquid assets (which is likely to be a buzz word for sometime) on many of these firms' balance sheets -- firms that will benefit and not be held responsible BECAUSE of Bush's bailout -- was due to the practice of lending mortgages with ambiguous, misleading and fraudulent language in the Truth in Lending forms. The problem is that these types of loans are still out in the market, they will have interest rate resets (ballooned payments on loans that were negatively amortizing) and cause borrowers much financial stress in the coming months, and now the government will assume the responsibility of them (illiquid assets), while Wall Street, without any regulation reform passed by Congress, will be able to go back out and lend some more.

What about homeowners? What about Main Street in general? Just because Wall Street's trash was being carried out to the curb by the Treasury and Fed, doesn't mean "Bush's Bailout" automatically smells good for the rest of America. Why wasn't mortgage modification for troubled borrowers a provision added to the bailout? Then, lenders would have had to modify mortgages (that had no business being written in the first place) in order to dump their garbage assets onto the government. Bush wasn't vague about this issue, he just omitted it all together.

Bush said today, "[M]y administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system, including those in the regulatory blueprint submitted by Secretary Paulson earlier this year."

One has to be dubious of the president's claim of restoring transparency. Not only was it Republican-led legislation (Phil Gramm: Commodity Futures Modernization Act of 2000 and Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act, allowing commercial and investment banks to consolidate) that enabled today's bailout, but the fact that Bush doesn't even use the word bailout is troublesome and lacks transparency.

Again, as I've said in many other blogs, we'll have to wait for the next administration to come in and do its best to try and straighten out the last eight years of missed opportunities. Not extending an olive branch to average citizens, as Obama suggested today, is another missed opportunity by the Bush Administration.

Originally posted at InjuryBoard by Paul Kiesel

Obama, Biden, McCain and Palin on the Federal Government's Takeover of Fannie & Freddie

Paul Kiesel — Mon, 08 Sep 2008 20:06:03 GMT

Both presidential candidates Barack Obama and John McCain said on Sunday that they see the federal takeover of mortgage finance companies Fannie Mae and Freddie Mac as necessary.

The vice presidential nominees, Joe Biden and Sarah Palin, had different views on the situation, with Palin leaving many scratching their heads after a few misstatements on the issue.

Barack Obama

"Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy"

Obama also said that the plan for Fannie Mae and Freddie Mac needed to focus on strengthening the economy and helping struggling homeowners rather than focusing on "the whims of lobbyists and special interests."

John McCain

"The long-term reforms are to scale down Fannie and Freddie so their size is no longer a threat. And then to privatize them. Get them off the taxpayer's books entirely," said McCain's chief economic adviser, Douglas Holtz-Eakin, who replaced Phil Gramm after he stepped down as McCain's co-chair over the summer.

Holtz-Eakin went on to say, in a telephone interview with Reuters, "The next steps would be to have credit market conditions stabilize and have the ability, as a result, for firms to access capital again so that they can scale down their portfolio holdings."

*It's important to note that McCain's former economic adviser, Phil Gramm, whom he recognizes as the savior of his campaign's financial struggles from a summer ago, was the author of the Commodity Futures Modernization Act of 2000, which, incidentally, allowed for the mortgage crisis to precipitate in the manner it did. The bill helped deregulate many sectors, including lending and energy (Enron), and provided private companies the luxury of not having to be completely, if at all, transparent in their accounting (nor accountable), as governmental oversight waned.

Joe Biden

Joe Biden says the government's rescue of the big mortgage companies Freddie Mac and Fannie Mae should not mean bailing out shareholders at the expense of taxpayers.

Biden feels it's important to help homeowners and make sure the two companies still are in a position to keep making loans.

On Sunday, Biden told NBC's "Meet the Press" that he had spoken to Treasury Secretary Henry Paulson on Saturday night, and that he thought the plan had a good chance of succeeding. "It’s not an official reorganization. It will be left to the next administration and the Congress to make those judgments," Mr. Biden said.

Sarah Palin

Speaking before voters in Colorado Springs over the weekend, the Republican vice presidential nominee claimed, after omitting economic policy from her acceptance speech at the RNC last Wednesday, that lending giants Fannie Mae and Freddie Mac had "gotten too big and too expensive to the taxpayers." However, the companies aren't taxpayer funded. They operate as private companies. The takeover may result in a taxpayer bailout during reorganization.

The Huffington Post jumped on this gaffe earlier today and so did several economists, conservative and liberal, who were concerned with the misstatement.

"You would like to think that someone who is going to be vice president and conceivable president would know what Fannie and Freddie do," said Dean Baker, co-director of the Center for Economic and Policy Research. "These are huge institutions and they are absolutely central to our country's mortgage debt. To not have a clue what they do doesn't speak well for her, I'd say."

"Heretofore, if the treasury had a balance sheet there would have been a liability but there was never a taxpayer payment before [the bailout]," said Gerald P. O'Driscoll, an economist with the Cato Institute. "[Fannie and Freddie] were not taxpayer funded. They had taxpayer guarantee, which is worth something, especially in the stock market..."

Maybe Palin assumed that the two former private entities were taxpayer funded because in July they were being offered low market interest rates by the Fed, at the taxpayers expense. Or the fact that there was always an implicit guarantee that Fannie and Freddie would be backed by the government if they failed, again, at taxpayers expense. However, before today, Fannie and Freddie had not drawn down any of the credit line given to them by the Treasury, so her assessment still wouldn't make sense.

Originally posted at InjuryBoard by Paul Kiesel