Wednesday, September 10, 2008

Sarah Palin's Non-Gaffe About Fannie/Freddie

Terrified about the enormous popularity of Sarah Palin, and the extent to which this has boosted the McCain-Palin ticket, the Democrats are now trying to dig up any possible "dirt" or mistake from her. I won't here bother trying to comment on most of these accusations, most of which are probably false but some of which might be true . Instead I will focus on the alleged gaffe she made about Fannie Mae and Freddie Mac in wake of the de fact nationalization of these two "government sponsored enterprises". Apparently, what she said was:

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

I have great difficulty in seeing what is wrong with that statement. The fact that they are considered to be "too big to [be allowed to] fail" is clear evidence that they have gotten too big. And with this formal government take over, they will cause hugh losses for the tax payers (wiping out shareholder's equity will only help too pay for a small part of their likely losses).

Some have objected to the temporal form of "gotten too expensive", arguing that it implies that Palin doesn't know they were until just recently private owned and didn't receive any formal payments from the government. Well, I don't know how much she knows about this and it is possible that she did believe it. But it seems more likely that she simply referred to the fact that this takeover will imply losses for the tax payers. It's not unusual for politicians to misspeak somewhat. For example, Obama has said that he will campaign in all 57 states, said that his uncle liberated Auschwitz (which would imply that he was enlisted in the Red Army since it was Soviet troops that liberated Auschwitz), said that he was campaigning in New Pennsylvania (maybe that's one of those 7 additional states Obama has discovered...) when he was campaigning in New Philadelphia and talked about his Muslim faith.

Anyway though, while Palin may not have known about this, the fact is that according to standard accounting principles, the losses that tax payers will suffer should really be considered to be something they have suffer. After all, Fannie & Freddie have long had the status of "government sponsored enterprises", which is to say that they have in effect been subsidized by the government through the implicit guarantee. Moreover, the mortgage lending that caused the current losses was something that happened in the previous years. And since a fundamental (a very sound one, BTW) principle of accounting is that profits or losses should be attributed to the time period of the activities that caused them, this means that the losses very mostly something that arose in the past. While formal retroactive revisions of old earnings statements aren't always recommended for various practical reasons, that does not change the general principle that losses and profits should ideally be attributed to the time period of the activities that caused them and it certainly doesn't make it wrong for analysts to attribute them to the right time period in their analysis.

So far from exposing some embarrassing ignorance from Palin, the left-liberal economists who have criticized her have in fact only exposed their own ignorance of the principles of accounting.


Post a Comment

<< Home