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Email Story "Economic Choices 2008"-McCain Economic Adviser Douglas Holtz-Eakin Forecasts The Future of Fannie Mae & Freddie Mac Friday, July 11, 2008 SUSIE GHARIB: The Fannie Mae and Freddie Mac situation was front and center for the presidential candidates today. While not commenting on specifics, Democrat Barack Obama's campaign said he recognizes Fannie and Freddie are essential and that as president, Obama would do what's need to keep housing affordable. Republican contender John McCain said government assistance would likely be needed for Fannie and Freddie because their failure would ripple through the economy. As we continue our "Economic Choices '08" coverage, Washington bureau chief Darren Gersh sat down with McCain's chief economic adviser today, Douglas Holtz-Eakin. Darren began by asking him whether Senator McCain thinks regulators and the Bush administration are doing enough to support Fannie Mae and Freddie Mac DOUGLAS HOLTZ-EAKIN, SR. POLICY ADVISER, MCCAIN CAMPAIGN: Well, one never knows exactly what is going on behind the scenes, but from what we've seen in the markets and from what we've seen on the ground in the housing market over the past 18 months or so, the senator absolutely understands the need to make sure that Fannie and Freddie are given support so they don't fail. You don't want to see a financial system that faces further threats from the kind of shock this would produce. So take the steps necessary to give them short-run liquidity, take the steps necessary to support acquiring more capital -- there's no substitute for more capital, and at every step in that process, let's get reforms so we that have good regulatory oversight and good market discipline for these institutions. You don't want to take the step of always putting the taxpayer as a backstop to these two companies. DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: But when Senator McCain said that they can't be allowed fail, it seemed to imply that he would support putting government funds into these companies to make sure that the government would do whatever it took to make sure they stayed afloat. So would he support putting money in -- taxpayer money, if necessary? HOLTZ-EAKIN: Well, the circumstances would dictate the right response. There are lots of steps between where we are today and the actual act of writing a check from the Treasury to these companies. They have high quality instruments on their books, they can use those to generate liquidity. GERSH: But many Republicans have been concerned that we would come to this, that these companies would require federal funds. And it sounded like Senator McCain was saying that if necessary, he would, indeed, do that. HOLTZ-EAKIN: There is a longstanding concern that there is an implicit guarantee behind Fannie Mae and Freddie Mac, because of all of the special... The senator doesn't want to see further disruption of financial markets, very undesirable at this point in time, and we certainly don't want to see anymore downward pressure on housing markets. So what he has stated is the clear objective of making sure that there is a path through the current turmoil that involves reforms, involves more capital in these institutions, and thus insulates the taxpayer in the long run. GERSH: A lot of the economists I've talked to, a lot of people in the markets I've talked to have said, look, this kind of situation shows that the credit crunch is deepening, and that the economy is going to be softer over the next six months. HOLTZ-EAKIN: There is no reason to rule out the fact that the economy might be softer going forward. There has been a lot of evidence of downward pressure in the housing markets. We've seen consumers hold up remarkably well, but there are obvious reasons for concern. The big problems the US economy faces are energy prices and the housing market. And the senator has taken on those both of those problems aggressively. He has got a Lexington Project for energy prices, and a plan to address the need for refinancing by some homeowners. The latter is unlikely to make it through, so he would like to see the bill that is actually moving get done quickly. And on energy prices, we need to take control of our energy future. Those are good ways to address what's ailing the US economy, and then move to the bread and butter of getting jobs for Americans. So the stimulus effectively -- we're not going to see much more of it. If the economy looks like it is going to get softer, don't we need a second stimulus? HOLTZ-EAKIN: Well, you want to look at the economy and see if you can address the problems it faces. You could leave $50 billion in the hands of American consumers very quickly by not collecting a gas tax. GERSH: Top economic adviser to Senator McCain was Phil Gramm, who said we're in a "mental recession,: and that people were whining about it -- some people were whining about it. Is he going to have any role going forward in economic policy in Senator McCain's campaign? HOLTZ-EAKIN: Senator McCain made it very clear that Senator McCain speaks for Senator McCain. He doesn't endorse or in any way show any sympathy for those comments. And he said that, you know, Senator Gramm is now high on the list of candidates to be the ambassador to Belarus, so I think... GERSH: That's very funny, but is he going to be talking to Senator Gramm? HOLTZ-EAKIN: Obviously, the senator doesn't endorse those views and he is not going to promote anything that looks like a mindset that suggests we don't understand that Americans are suffering. They need jobs, and the senator is focused on those kinds of efforts. GERSH: Is Senator Gramm still giving advice to Senator McCain? HOLTZ-EAKIN: At -- I haven't spoken to Senator Gramm since the comments took place, and I'm not expecting to. GERSH: Doug Holtz-Eakin, economic adviser to John McCain, thank you.
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