Ouch
September 15th, 2008 . by economistmomMore symptoms of the “super subprime” problem today, with Lehman Brothers declaring bankruptcy, Merrill Lynch’s takeover, and the Dow suffering its worst decline in seven years (more than 500 points).
Guess it’s time for voters to start paying a little more attention to what the candidates have to offer in terms of a true change in direction for economic policy–as Chris Cillizza and Dan Balz suggest on their Washington Post blogs today. If I were the McCain campaign, I’d stop calling attention to all their deficit-financed tax cuts for the rich (which would include the CEOs they were so critical of today) and their general philosophy of (as Sarah Palin put it) getting government “out of the way…of the private sector” (which would seem to preclude McCain’s promise today to “clean up Wall Street”). And if I were the Obama campaign, I’d stop calling attention to how close to Bush policy extended their proposed tax cuts are, in that contest they seem to be having with the McCain campaign about who’s cutting taxes (and increasing the deficit) more.
(Oh, glad to see Brad DeLong noticed the irony in McCain’s comments about the CEOs, too, in a thread with an even shorter title than this one.)
Yes, it’s time for all of us to start paying attention to the real issue of the economy in this campaign–time to listen to the substance of what these candidates are actually proposing to change regarding the course of economic policy. I know it’s not as fun as talking about lipstick, but we’ve got to try.
Ironic, huh?? Think that could backfire? I hope…
David Gregory had a great interview with Carly Fiorina tonight where he questioned the rationalization between McCain’s ‘free economy’ stump speech and his agreement with the Fannie/Freddie overhaul and further market regulation. Fiorina stated that McCain was for capital requirements (reserves) for investment banks, mortgage issuers, etc. Didn’t sound very ‘free market’ to me (or to David Gregory).
McCain has recently been a walking, talking contradiction of terms. Unfortunately most Americans could care less. I do think, however, that Independent and swing voters are much more likely to care about this stuff than are diehards in either party.
Yes, it’s time for all of us to start paying attention to the real issue of the economy in this campaign–time to listen to the substance of what these candidates are actually proposing
The real issues, yes — but not so much what the candidates are proposing, when we know that’s not real, as we often do.
E.g., here’s McCain’s guy Holtz-Eakin on reality (quoted through Joe Klein):
That “annual tax hike of $550 to $700 billion” compares to total income taxes collected in 2007 of about $1,500 billion — you do the math.
Lest anyone think it’s particularly hypocritical on the part of Holtz-Eakin and McCain to campaign on “tax cuts” knowing these kind of tax hikes are coming, remember that the same reality faces Obama and he’s promising a net tax cut from today too … Obama’s econ guy Furman is now arguing against a health care reform he himself proposed before the campaign started and McCain endorsed it … FDR ran on a balance-the-budget promise in 1932 .. etc. etc. Everybody in a campaign puts selling their “brand” first and being honest about the future well afterward.
That said, the difference in the future fiscal realities presented by the two candidates look to me like this:
Whatever happens, the Democrats retain control of Congress so the Bush tax cuts expire. Then if …
[] McCain wins, he reverts to the earmark-damning budget hawk he’s been during his career to date (when not running in an election year) pleasing his base on the right by vetoing mass Democratic spending proposals. He can’t get any spending of his own through, because the Dems control Congress.
The net result is tax increases with restricted spending, and the closest thing to budget discipline seen since 1997 (also a time of divided government).
[] Obama wins, the tax increase from the repeal of the Bush cuts is accompanied by Dem committee chairmen and interest groups pouring through Congress a 14-year backlog of all their favored spending that they’ve been deprived of since losing power back in 1994. The same feeding at the trough we saw with the Repubs after they got monopoly political power in 2001, only with the emphasis on spending increases rather than tax cuts.
I don’t see from Obama’s record any sign that he’d have any interest in stopping it — nor, considering how shallow his roots are in the national party, how he could stop it if he wanted to.
That’s what my crystal ball says about realistic future budget options. For all the election talk about tax proposals, the real difference to me looks to be in future spending. Take your pick.
One person’s opinion, FWIW.
I would tend to agree with Jim Glass if it were just a matter of strict budgetary matters; however, that has never been true. There are many things outside of the budget that a president can do to affect the budget itself. The Iraq war is a case in point. A continuation of that war would cost many billions in additional appropriations which the congress would find difficult in not approving. I believe McCain would be much more aggressive in pursuing that war than Obama would.
If McCain continued the incompetency of the Bush Republican administration, we would again spend billions more needlessly. I frankly see an Obama administration much more truly fiscally conservative than any Republican administration. Remember fiscal conservatism is much more than just saving/spending less money, it is about spending it wisely.
Just don’t forget the cause of this subprime mess.
Why were the lenders lending to such risky individuals?
Government requirement to give loans to “disadvantaged” buyers. That increased the demand for housing, which pushed prices up. That lead to more and more loans that people couldn’t afford.
Then interest only loans based on the assumption that the price would continue to rise so they could sell when the interest only period ended. So people bough way beyond their means, again raising prices further.
The “economy” didn’t cause the housing bubble or sub-prime mess. The government did. Now they want to bail out the market, a move certain to cause a bigger mess because the underlying problem isn’t dealt with (like all government programs).
Meanwhile, I bought a small place on a 15yr fixed rate mortgage in ‘99. I did not “move up” using interest only or balloon mortgages, though a larger place would have been nice. I knew I couldn’t really afford more. I didn’t refinance for a lower rate or take out equity either. I continued to live within my means. In 6 years my place is paid for. Then I can save for a bigger place or improvements to the current place.
And, since the foreclosure rate is 2-3%, I’d suggest most (97-98%) people did the smart thing too. Why should the government be bailing out companies and people that made bad decisions?
Thomas: What requirement to give loans to “disadvantage” buyers? As far as I know, there is no such thing. Please provide a link/or reference so I can look it up. Thank you.
That’s not true! My title had two quotation marks and a question mark! It was too longer than yours…
sootytern,
Look up the 1977 Community Reinvestment Act (CRA), which compels banks to make loans to low-income borrowers and in “communities of color” that they might not otherwise make based on purely economic criteria. This led to low- and no-documentation loans too.
In order to help finance all of these risky loans and still make money, we got all the weird financial instruments, like “mortgage backed securities.”
Try these
http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/03/09/how_government_makes_things_worse/
http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0
http://www.naplesnews.com/news/2008/jul/22/thomas-sowell-politicians-created-lending-crisis-t/
Or, maybe this from last year
http://www.lewrockwell.com/dilorenzo/dilorenzo125.html
Just a few I found with a quick google search.
Thomas: Sorry to post so late on this thread. I looked up your references today. Jeff Jacoby is definitely not a good source for information on the Community Reinvestment Act - he is an opinion columnist not an economist. In addition, he invariable takes an extreme right wing point of view, in other words, biased. This also goes for the NY Post. Thomas Sowell is an economist and I know very little about him although I did look him up on wikipedia.
I also went to the government sites. The first thing I noticed was the date of the CRA enactment, 1977. It seems this law took 25 years to take affect. Frankly, I don’t think so. Personally, I believe it is a real stretch to blame this law on the disaster of the last year and on the terrible loan standards of the last five years. It looks like a strawman.
Interesting,
I’ve been reading Sowell’s columns for 10 years, and you’ve never heard of him?
perhaps you should read some of his past work.
http://townhall.com/columnists/ThomasSowell
How about Walter Williams?
http://townhall.com/columnists/WalterEWilliams
Another economist you’ve never heard of?
http://townhall.com/columnists/WalterEWilliams/2008/09/17/stubborn_ignorance
It took 25 years for the full effect to be felt. The community groups demanded more and more. Not to mention the changed to the CRA in the 90s. The CRA also contributed to the S&L collapse in the 80s. Then mortgage companies took over the market, and now they’ve got burned.
Do you really think the lenders mad bad loans with almost no chance of the being repaid on there own? Why do you thing the oversight system didn’t catch it? Because the loans were required by the CRA. Without them the lenders couldn’t conduct the business they wanted (new branches, mergers).
Any it’s not just the CRA, but it is a big factor. If not for the CRA forcing banks to lower their standards, the housing “bubble” would not have been as pronounced. The “bubble” kept the lenders afloat for a few extra years, since the collateral had a rising value, which helped cover the risks, and allowed refinancing when the loan payments went up.
Unintended consequences often take a long time to show up.
Who’d of thought that in arming and training the Afghans against the Soviets, we’d one day have to fight them ourselves. Or Iraq against Iran?
How about the rise in medical cost due to the proliferation of health “insurance” particularly the government funded forms. Or that Social Security would lower the retirement savings people put away.