N-n-now that that don’t kill me, can only make me stronger

Sarah Palin, recently said 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.

Now, I suspect her advisors told her to say that, but beyond the obvious hat-tip to fiscal conservatives, what did she really mean? Which deserving, creditworthy homeowners would she have Fannie Mae and Freddie Mac decline? To whom would she have Fannie and Freddie sell the mortgage bonds they hold – to a foreign-government-owned investment bank, that steps up to replace their diminished role? Which local communities will have liquidity problems when Fannie and Freddie aren’t there to help? What if Wall Street isn’t willing to guarantee the mortgage investments (as Fannie and Freddie do), will the flow of mortgage capital dry up? What, then, Sarah?

Remember, Fannie Mae was created during another liquidity crisis. In 1938, many responsible borrowers couldn’t get loans to pursue the American dream of homeownership. Wall Street just wasn’t able to keep up the supply of lendable money. So, Fannie was chartered with the primary mission of “increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans“.

Now, maybe Palin doesn’t believe in widespread and affordable homeownership for the majority of Americans. Many other countries, like France, don’t. But, somehow I doubt Palin doesn’t support it. So, if Freddie Mac is to play a smaller role – in providing mortgage lenders with funds to lend to homeowners, which Americans would Sarah have miss out?

Further, is Palin really wanting this country to be at the will and whim of rapidly changing interest rates? Will this precipitate another Savings & Loan crisis, when lenders were stuck holding 6% fixed-rate mortgages in an 18% rate environment? Community banks, thrifts, and savings and loans institutions couldn’t survive then, and without Freddie wouldn’t be able to survive today. Will Palin let them fail, or will she bail them out after the fact? Either way, we’ll end up with a huge government intervention, much like was needed during the Depression with the Reconstruction Finance Corporation. This makes our financial system stronger, how?

And, if Freddie Mac is to be downsized, who will stabilize the residential mortgage market, which has allowed regular refinancing options for existing homeowners and rapid approval of sound loans to new homeowners? Without Freddie, banks can’t as easily sell their loans to the mortgage bond market, which would translate into higher interest rates. Who does that help? Private equity funds? Why does Palin think they need help right now?

I keep listening but I don’t hear Palin explaining herself. I don’t hear answers to all these questions. But, let’s not underestimate the significance of Sunday’s takeover of Fannie and Freddie – this is one of the single biggest actions the administration could ever make. For Palin to quickly pronounce, without consideration, without explanation, is a telling window into her governance style. And, I’m not sure the pain involved with another hasty decision-maker will make us stronger.

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