Tough Decision Coming

Thursday, August 28, 2008

FOR ALL THE talk about energy, taxes and health care, the first economic policy challenge to face the next president could be coping with a crisis at Fannie Mae and Freddie Mac -- and the related job of reforming them to make sure they never put the global financial system at risk again. Republican John McCain, long a skeptic of the two government-sponsored enterprises, has said that, if the government must bail them out, it should fire their current boards and managers en route to full privatization. Until now, Democrat Barack Obama has been more circumspect, agreeing with Mr. McCain that taxpayers should come before shareholders and managers but offering few concrete ideas about the ultimate dispensation of the companies. But this week he's given an encouraging hint of fresh thinking about the problem.

This is not an easy one for the Illinois senator because of the companies' close ties to his party. To be sure, both Republican and Democratic politicos have held well-paid positions in the two firms or have partaken of the tens of millions that they spend on lobbying. But a few Republicans, such as Mr. McCain and Sen. Richard C. Shelby (Ala.), who has been chairman and ranking Republican on the Senate Banking Committee, have taken them on over the years, warning about their use of an implicit government guarantee to pursue private profits. Meanwhile, Democrats were not only politically but intellectually committed to the companies, seeing them as innovative public-private institutions that have been a boon to homeownership. In the current crisis, their biggest backers have been Democrats such as Senate Banking Committee Chairman Christopher J. Dodd (Conn.) and House Financial Services Committee Chairman Barney Frank (Mass.). Two members of Mr. Obama's political circle, James A. Johnson and Franklin D. Raines, are former chief executives of Fannie Mae.

Now, however, Mr. Obama may be inching away from the conventional wisdom. On Monday, he hinted for the first time that he thinks the GSEs' current model is unsustainable. "I think long-term what we have to do is, we have to go ahead and make a decision, if these are public entities, then maybe they ought to get out of the profit-making business," Obama said at a campaign appearance in Davenport, Iowa. "And if they're private entities, that we don't bail them out." He added: "We're going to have to structure that carefully how we make that transition in order that we don't get the housing market even more spooked than it already is." Some Democrats, such as former Treasury secretary Lawrence H. Summers, have "gone ahead and made a decision"; Mr. Summers has basically echoed Mr. McCain's call for eventual privatization. But, however hedged, Mr. Obama's comment shows that he understands the stakes and that he is moving in the direction of economic reality.

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