It seems that there are certain key events during an election season that give us a real demonstration of how the candidates would govern if elected.
The past weeks series of dramatic stock drops and government bail-outs of financial institutions seem to be one of those key events for this election cycle.
The issue, it seems to me, is not that hard to understand. Over the past 10-15 years, housing prices in many markets were climbing sky high. People still wanted the nice houses in the locations they wanted to live, which continued the upward climb of prices. At those prices, many were pressed into mortgage options which enabled them to get into the house (barely) but with the time bomb of adjustable rate mortgages ahead.
Then as the "housing bubble" burst (does any bubble not burst eventually? - hint to future economic planners), home values declined (i.e. now owners couldn't borrow so much against the value of their homes), and as ARMs came due, people couldn't afford their mortgage payments, so go into default and all that. The cumulative effect of all this is that the lenders (and above them the insurers) have had both a decrease in income as people default on payments, and a dramatic drop in the value of their "assets" which were heavy on over-priced homes that were now worth much less). And that, essentially, is what has brought "Fanny and Freddie" and AIG and others to the brink. It has also made practically all "lenders of money" want to sit on their money and not lend it out, causing a major "credit crunch" throughout the economy.
Because "Fanny and Freddie" and AIG and so forth are so key to the overall confidence in the US and world financial system, the US government has had to step in to support them with taxpayer dollars.
So there's the problem. So what do we hear from the candidates?
Obama: 'this is all the Republicans fault. McCain is "out of touch" with economic reality and he is old (read: old thinking) so you need to have me step in with new ideas to get us out of this mess that, did I mention?, was the Republicans' fault.'
McCain: 'this is the result of many years of both Democrats and Republicans looking the other way when real reform of the system was needed. In fact, 3 years ago I specifically asked the Senate to approve a reform measure that would have gotten at the problems we are now seeing come to fruition today, and I predicted then that a failure to act would eventually lead to exactly what we are seeing now. At the time I was working to get those reforms enacted, Senator Obama was silent on the issue. Perhaps it was because he was getting more donations from Fanny & Freddie than any other senator except the Democratic chairman of the committee considering these reforms. Certainly he has picked some of the key former executives of Fanny, Freddie, and AIG for key positions in and advisors to his campaign.'
Of the comments I hear from the candidates on this topic the past few days, the one that seems most to the point to me is the fact that McCain was actually working several years ago to pass a reform bill in the Senate designed specifically to prevent the kinds of things that have led to this financial crisis. At that time Obama was not saying or doing anything about it.
So it's kind of easy for Obama to stand up now and complain, isn't it? And yet it was McCain who saw it and was fighting to do the right thing - when nobody else was paying attention. Now that it's a popular thing, we see Obama coming around to the same point, I guess.
Follow the link above to read McCain's statement to his fellow Senators in 2005.
5 comments:
Ummm....you mean John "decades of advocacy for deregulation" McCain?
I'm speaking specifically of the regulation of Fannie and Freddy, etc. I will try to find and post the actual arguments on the floor from McCain...they are very interesting....
yeah. i see it. interesting, and i'm glad to hear it. at the same time, it is also very specific to those 2 entities. as i understand the problem, it was so endemic to the laxly regulated industry of non-bank financial institutions, that even regulation of Freddie and Fanny would not have prevented the catastrophic problem we are seeing unfold. i wonder if he has any other record on this issue cuz he has made general statements advocating deregulation....
Even George W. a few years back was trying to control freddie and fannie. Not sure why it never happened. It is hard to have a good market without some regulations to keep things fair. The fact that some of these companies were able to attain 100:1 leverage was crazy. At those leverage rates, the little bump in foreclosures from 2% up to 4% or so can really wreck a portfolio.
However, the government has already doubled its investment in AIG, and with taking over freddie and fannie, the government can hold onto large amounts of foreclosed real estate instead of dumping them back onto the market. This may help stabilize prices. And nothing really changed, as freddie and fannie were essentially taxpayer backed anyway.
I think it's amusing for McCain to assume that his proposed solution would have fixed the problem. Much of the problem has not been that there was no regulation, but that the regulations were manipulated for political purposes, requiring private banks and Freddie and Fannie to start offering higher risk loans. Congress and federal agencies started meddling, and that meddling is largely responsible for the mess. Yes, there is a lot of corporate irresponsibility and corruption, as well, but I think that is the little brother to the mess government, itself, made of things in the first place. So, knowing that government created the problem, it is laughable that McCain thinks that his attempt to change how government regulated the industry would have fixed the problem, unless, of course, his "solution" included rescinding the Community Reinvestment Act and the requirements that Freddie and Fannie keep loaning to people who were a bad risk.
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