When I first heard the term “spongy conduits”* I thought it was either a breakfast cereal for kids or new insole from Dr. Scholl’s. It turns out it was actually a term conjured up by a Congressional Budget Office staffer to describe the government subsidy benefits retained by Fannie Mae and Freddie Mac. That he came up with this term in a CBO report in 1996** is even more remarkable, given what we now know following the collapse of the housing market in 2008. The CBO report at that time concluded “Congress may want to revisit the special relationship that exists between the government and Fannie Mae and Freddie Mac.” That is bureaucrat speak for “Holy S*#t!”
Fannie Mae and Freddie Mac are what are referred to as government sponsored enterprises, or GSEs. What’s a GSE? Prior to 2008, I assumed it was something like Burt’s Bail Bonds that advertise on the back of your kids little league uniforms. A GSE is a financial service organization created by Congress that has an implicit guaranty from the government that the taxpayer will pick up the tab should it suffer any losses. As we now know, this became an explicit guaranty after the housing meltdown. In other words, Fannie and Freddie privatized all profits and socialized any losses. As we further learned, GSE also stands for Guarantied to Screw Everyone. Lest we think this is now just limited to financial services, this philosophy is also known as the Obama green energy policy.
Under the leadership of CEO James A. Johnson, Fannie Mae learned to strong arm federal regulators and spent lavishly lobbying Congress. In 1996 there was some sentiment in the government to fully privatize Fannie Mae and Freddie Mac. The Treasury Department was about to issue a report that sketched out a privatization route for both Fannie and Freddie and outlined risks to the taxpayers that the companies represented. The Fannie Mae hammer came down hard on the Treasury Department. Then-deputy secretary of the Treasury, Larry Summers, intervened and demanded the report be rewritten to the point that it was unrecognizable from the original report. (Word has it the rewritten report was later used as the pilot script for the Real Housewives of Atlanta television show.)
Larry Summers, you may recall, later served as one of President Obama’s economic advisers and before that was president of Harvard University. He was forced out at Harvard after he had the audacity to suggest that there may be some differences between men and women. Many women’s groups were outraged, with some of the women having the moustaches to back up their complaints. Even the LBGT community was perturbed. (I was surprised to learn LBGT is not a national frozen yogurt chain.) There may be a spongy conduit joke in there somewhere, but I’m not touching it.
What can be learned from this? First, any government agency (GSE or otherwise) with a name that sounds like a character from a 1960s sitcom is dangerous. Second, there is no such thing as an implicit government guaranty – even when it doesn’t exist, it’s explicit. Lastly, the government keeps meddling in the housing market, which means it is Guaranteed to Screw Everyone.
*The factual information contained in this article is taken from the excellent book, Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. For any of the jokes, I alone must be blamed.
**Interestingly enough the document has apparently been removed from the CBO site. Links to it from other news stories now go here: http://www.cbo.gov/publication/10339 where this is a reference to it, but the document is not available.
Curtice Mang is the author of the new book, The Constitution – I’m Not Kidding and Other Tales of Liberal Folly. He can be contacted at www.mangwrites.com, where one can also purchase his book; or contact Curtice at mangwrites at cox.net.