Candidates React to Fannie-Freddie Bailout

Barack Obama and John McCain agree the short-term action's a necessityt and call for a clarification of government's role in the housing market.
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The

federal government's seizure

of

Fannie Mae

(FNM)

and

Freddie Mac

(FRE)

over the weekend isn't the end of the saga -- the housing mess will have to be solved jointly by leaders in Congress and the next president.

Overall, the presidential candidates agree that strong action had to be taken to stabilize the housing market.

Sen. Barack Obama (D., Ill.) commented on the bailout plan over the weekend. "Given the substantial role that Fannie Mae and Freddie Mac play in our housing system, I believe that some form of intervention is necessary to prevent a larger and deeper crisis throughout our entire economy," he said.

Sen. John McCain (R., Ariz.) offered a similar -- if not more tepid -- response. "We need to keep people in their homes, but we can't allow this to turn into a bailout of Wall Street speculators," he said.

Whichever hopeful -- Obama or McCain -- takes control of the White House in January will have a role in shaping the future direction and structure of Fannie and Freddie.

In announcing the conservatorship Sunday, Treasury Secretary Henry Paulson characterized the bailout as a "time out" of sorts that will stabilize Fannie and Freddie and allow policymakers time to come up with a reform plan that will resolve the inherent conflict in their current structure. Currently, these private-public firms must answer to shareholders seeking profits and also fulfill a mandate to serve the public. Sometimes the two collide. Paulson charged lawmakers directly in his statment:

"Because the GSEs are Congressionally-chartered, only Congress can address the inherent conflict of attempting to serve both shareholders and a public mission. The new Congress and the next Administration must decide what role government in general, and these entities in particular, should play in the housing market."

In this regard, whoever wins the November election will have to work closely with

Federal Reserve

Chairman Ben Bernanke, whose term expires in 2010. For his part, Bernanke endorsed Paulson plan in a press release:

"I strongly endorse both the decision by FHFA Director Lockhart to place Fannie Mae and Freddie Mac into conservatorship and the actions taken by Treasury Secretary Paulson to ensure the financial soundness of those two companies. These necessary steps will help to strengthen the U.S. housing market and promote stability in our financial markets. I also welcome the introduction of the Treasury's new purchase facility for mortgage-backed securities, which will provide critical support for mortgage markets in this period of unusual credit-market uncertainty."

A major problem with government-sponsored enterprises, or GSEs, has always been the risk to taxpayers. How much support would the government offer to help save a GSE? We now know that the support could reach into the hundreds of billion dollars.

Obama called for a clarification of the GSEs' roles. "Once we ride out the current crisis, the plan must move toward clarifying the true public and private status of our housing policies," he said.

Chief economic adviser for the McCain campaign, Douglas Holtz-Eakin, offered a clearer sense of what would occur with the GSEs in a McCain administration. "The long-term reforms are to scale down Fannie and Freddie so their size is no longer a threat. And then privatize them. Get them off the taxpayer's books entirely," he said.

Speaker Nancy Pelosi (D., Calif.) recognized much work has yet to be done. She said:

"I look forward to working in a bipartisan manner with Secretary Paulson and other Administration officials and congressional leaders in reviewing the implications of action taken this weekend to ensure that the interests of taxpayers and the broader economy are protected."