Public-Private Partnership

I was going to give WSJ Ed Page Editor Paul Gigot a quote of the day, for this little bon mot:

My battles with Fan and Fred began with no great expectations. In late 2001, I got a tip that Fannie's derivatives accounting might be suspect. I asked Susan Lee to investigate, and the editorial she wrote in February 2002, "Fannie Mae Enron?", sent Fannie's shares down nearly 4% in a day. In retrospect, my only regret is the question mark.

Reading the rest of the editorial made me realize that this needed a little more coverage. Long time readers of the WSJ Ed Page have followed the battles with Fannie and Freddie -- if you're behind, they have compiled them here.

Gigot takes the unusual step of writing a bylined editorial on his own page, and I strongly suggest that you read the whole thing. He and his staff were on the front lines against this perverse hybrid of government and private power. He has certainly earned a few I-told-ya-sos, but he uses the space to expand and discredit the whole idea of mixing government power with private enterprises.

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.

It is germane not only because we are bailing out Fannie and Freddie today, but also because Senator Obama, and to a lesser extent, Senator McCain both have a soft spot for this "third-way" model, Public-Private Partnership. It's all Kumbaya all the time, until you realize that you have created an un-reformable, undefeatable monster.

UPDATE: Great article by James Surowecki (other than cartoons, the reason to read New Yorker) on the GSEs. Professor Mankiw links and points out that it is one more thing to thank LBJ for:

It wasn’t until 1968 that Fannie was privatized....The main reason for the change was surprisingly mundane: accounting. At the time, Lyndon Johnson was concerned about the effect of the Vietnam War on the federal budget. Making Fannie Mae private moved its liabilities off the government’s books, even if, as the recent crisis made clear, the U.S. was still responsible for those debts. It was a bit like what Enron did thirty years later, when it used “special-purpose entities” to move liabilities off its balance sheet.

Jeez, them Enron boys were pikers...

Politics Posted by jk at July 23, 2008 11:39 AM