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Reason #1 why Newt Gingrich is a little bit frightening

Posted By Russ Roberts On December 8, 2011 @ 2:18 pm In Housing,Politics | Comments Disabled

By the title, I don’t mean the most important reason. Not sure what that is. This is just the first reason I’m listing. Maybe I’ll list more. And it turns out this reason is multi-faceted.

Reason #1 comes from a blog post by Josh Barro [1] who digs up this interview with Gingrich [2]. It’s not exactly an interview. It was conducted by Freddie Mac (whatever that means) and posted on Freddie Mac’s website.

There are many things that are frightening about Gingrich’s remarks. First, they are for Freddie Mac who paid him something around $1.6 million for his “services.” He described this work originally as being payment for his historical knowledge of housing. Cue laughter, folks. This interview gives you a glimpse of the real reason he was hired. He was hired, of course, to provide cover for Freddie Mac. Freddie Mac was a GSE, a government-sponsored enterprise. A GSE was quasi-private or quasi-public, take your pick. Freddie (and Fannie Mae) bought mortgages from originators and brokers. They provided “liquidity” for the housing market which is a fancy way of saying that they increased the amount of credit available. For a long while, they were relatively benign.

Because they were thought to had an implicit guarantee of government support, they were able to issue bonds at relatively low rates of interest. They were very eager to use that money to buy more mortgages. The problem was that because of that implicit guarantee, they were constrained by regulation to only buy fairly safe mortgages with 20% downpayments. Starting in the mid-1990′s, Clinton (and then Bush) required them to relax their standards. They didn’t end up buying a lot of sub-prime, just a lot of low down-payment mortgages that were very prone to end up underwater if housing prices ever fell. This injection of credit into the market pushed up the price of housing (starting around 1995) launched the housing bubble and along with other government programs, helped make speculative subprime lending.

The alternative view is the animal spirits view that suddenly, around 1995, people began to believe that housing was a particularly good investment. But for this discussion, the cause of the bubble is irrelevant. The important point is that Freddie and Fannie began to make increasingly risky loans, encouraged by their regulators. (See Figures 6,7, and 8, here [3].) A number of economists on the left and right began to worry that the taxpayer might end up on the hook for those loans if they ever blew up. They did blow up. The bill is $150 billion and counting. But because political pressure began to build against Freddie and Fannie, they pushed back. They hired people on the left (Stiglitz and the Orszags [4]) to do research showing how safe the GSE’s were. And they hired people on the right like Newt Gingrich who could claim conservative credentials and a really good Rolodex to reduce the pressure to reign in Freddie and Fannie.

So the first frightening thing about Newt is that he worked for Freddie Mac at all. The second frightening thing is that he lied about it, pretending it was some sort of research position. But the really frightening thing is what he actually said in the name of making people feel good about these so-called government-sponsored entreprises which led to private gains and socialized losses. The worst kind of cronyism.

Read the whole “interview.” [2] It’s short and you gives you a flavor of how Gingrich invoked conservative rhetoric to support Freddie Mac politically. But the highlight for me is this part:

Q: A key element of the entrepreneurial model is using the private sector where possible to save taxpayer dollars and improve efficiency. And you believe the GSE model provides one way to use the private sector.

Gingrich: Some activities of government – trash collection is a good example – can be efficiently contracted out to the private sector. Other functions – the military, police and fire protection – obviously must remain within government. And then there are areas in which a public purpose would be best achieved by using market-based models. I think GSEs provide one of those models. I like the GSE model because it provides a more efficient, market-based alternative to taxpayer-funded government programs. It marries private enterprise to a public purpose. We obviously don’t want to use GSEs for everything, but there are times when private enterprise alone is not sufficient to achieve a public purpose. I think private enterprise alone is not going to be able to help the Gulf region recover from the hurricanes, and government will not get the job done in a very effective or efficient manner. We should be looking seriously at creating a GSE to help redevelop this region. We should be looking at whether and how the GSE model could help us address the problem of financing health care. I think a GSE for space exploration ought to be seriously considered – I’m convinced that if NASA were a GSE, we probably would be on Mars today.

Gingrich says that the GSE model “marries private enterprise to a public purpose.” What we have learned is that that doesn’t work very well. But that’s not the most frightening part of the quote. And the most frightening part isn’t that this “interview” took place in April of 2007, when Freddie and Fannie were totally out of control, lending out money to buyers putting less than 5% down in record numbers, money that would not return as expected.

[5]

 

 

 

 

 

 

 

 

 

 

 

 

No, the really frightening part of this interview is the last part, when Newt goes off the deep end and says something grandiose, meaningless, and frightening:

I think a GSE for space exploration ought to be seriously considered – I’m convinced that if NASA were a GSE, we probably would be on Mars today.

What could that possibly mean, a GSE for space exploration? I think what he means is that it would be nice to have some incentives at NASA. How would that work? What is the GSE equivalent of Freddie Mac for NASA? It would be an agency that would buy up loans to fund space travel? No, that doesn’t make any sense. But the truth is, I have no idea how to make sense of it. And then the part where he’s “convinced, that if NASA were a GSE, we probably would be on Mars today.” Convinced? How do you convince yourself of something like that? And what does he mean by “be on Mars today.” We’ve already sent probes to Mars. We just sent another one the other day. I assume he means a person. Maybe he means the interviewer and himself. Probably not. But who knows? And why would “being on Mars” be a good thing? Wouldn’t it be incredibly expensive whether it was done by NASA or a NASA GSE? Is that a good goal? Why?

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URL to article: http://cafehayek.com/2011/12/reason-1-why-newt-gingrich-is-a-little-bit-frightening.html

URLs in this post:

[1] a blog post by Josh Barro: http://www.nationalreview.com/agenda/285056/newt-gingrich-gse-model-josh-barro

[2] this interview with Gingrich: http://web.archive.org/web/20080909224217/http://www.freddiemac.com/corporate/about/policy/policytalk_gingrich_42407.html

[3] here: http://mercatus.org/publication/gambling-other-peoples-money

[4] Stiglitz and the Orszags: http://online.wsj.com/public/resources/documents/stiglitzrisk.pdf

[5] Image: http://cafehayek.com/site/wp-content/uploads/2011/12/figure8s.jpg

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