The Wall Street Journal turned to a number of economists who were surprised by the housing crash that led to the need for a bailout of Fannie and Freddie, to tell its readers about the impact of the bailout on the federal budget deficit. The surprised economists all said that the bailout would lead to a substantial increase in the deficit and force the next president to change their budget plans. In fact, there is no reason that the next president should be terribly concerned over the deficit caused by the bailout, as any non-surprised economist could have told WSJ readers. The expense of the bailout was effectively incurred when Fannie and Freddie first made the losses that put them into bankruptcy. In effect, Fannie and Freddie, since they were operating with an implicit federal guarantee, were spending taxpayer money when they made the decision to buy up mortgages that would go bad. The taxpayers suffered those losses in 2004, 2005, 2006, and 2007, when they made bad decisions in the mortgage market. The bailout is effectively just an accounting exercise where we are acknowledging bad debts incurred in prior years. This would be comparable to a business where it is discovered that a manager had been ripping off millions of dollars over the last five years. They might find out about the theft in 2008 and record the loss in that year, but in reality the loss had been incurred in prior years. Similarly, the deficits associated with the Fannie/Freddie bailout were in reality occurred in past years. There is no reason to be concerned about the deficit it will create in 2008, because the deficit had actually been incurred in prior years. There will be no crowding out of investment or net exports (the reasons that economist worry about deficits) due to the money spent on the bailout in 2008. The WSJ should have found an economist who could have explained these facts to readers.
--Dean Baker
