In a move that appeared to be the culmination of a campaign of pseudo-intellectual man-on-the-street hogwash, McCain actually proposed a government buyout of mortgages worth less than the value of their homes. The full quote (thanks to the International Herald Tribune):
I would order the secretary of the Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes — at the diminished value of those homes and let people be able to make those — be able to make those payments and stay in their homes. Is it expensive? Yes. But we all know, my friends, until we stabilize home values in America, we're never going to start turning around and creating jobs and fixing our economy. And we've got to give some trust and confidence back to America. I know how the do that, my friends. And it's my proposal, it's not Sen. Obama's proposal, it's not President Bush's proposal. But I know how to get America working again, restore our economy and take care of working Americans.
Has McCain lost his mind? Does he honestly see this as a realistic way to gain back recent losses sustained at the polls? In times of inflation, (when nominal prices are rising), debtors win and creditors lose. because the real value of any debt -- what a lender can expect to get back -- decreases in real terms. In a time of deflation, or less-than-anticipated inflation, the opposite occurs, and the borrowers are left worse of because the real value of their debt increases relative to its anticipated level. The same applies when an asset is appreciating or depreciating.
How is it any business of the government whatsoever to interfere in these free market transactions? If it is the duty of the government to help debtors in times of asset-depreciation, why hasn't the government stepped in to help poor banks when the bill they receive for a house is less than anticipated in real terms, due to inflation? Though on the surface this seems similar to the proposal to buyout failing subprime mortgage-backed securities (SMBS), there is a world of difference. The earlier proposal actually makes sense, in a twisted sort of way; the SMBS are undervalued in a vicious bear-market right now, and have the potential, indeed, almost the certainty, to increase in value dramatically in the future, at which point the government could liquidate its SMBS assets and make a very healthy return. Aid the financial markets now, profit in the long-run; everybody wins.
Take three seconds or so to think if the above plan is somewhat different from offering to buy mortgages at above-market prices so that homeowners don't suffer the consequences of their depreciating assets. How would the Treasury renegotiate each and every individual mortgage? Does anyone seriously contend that this is possible, let alone worthwhile? If you do, my hat's off to you; you're an idiot and it must be difficult to get along in this hard, cruel world. These mortgages have been packaged into bundles by banks and sold as securities to entities like investment banks, (or banks have sold them to Fannie Mae and Freddie Mac, who did the bundling). The fact that people realized that many of the SBMS were fundamentally worthless is a large part of what got us into this mess.
McCain's proposal is vague, as are most stupid policy proposals, but I know enough about economics to know that it's not a good idea. Buying the mortgages at above-market prices would encourage stupid decisions, just as the government's bailout of firms like AIG encouraged moral hazard. Would the money go to the banks and the owners of SMBS, to take the homeowners off the hook? Perhaps. Would the homeowners be given the injection of capital directly, so they could individually renegotiate the terms of a new mortgage without fear of financial harm? Maybe. The one certain thing is that both ideas steer market actors away from the concepts they should hold most dear: risk and return.
It's no surprise that ever since the selling frenzy hit Wall Street McCain has been seriously down in the Intrade markets. Obama is a populist, taxing the rich to give to the middle-class. McCain is coming off as Obama-light; neither candidate can come up with an economic solution to this problem, but at least Obama is toeing the party line on the issue. McCain must be alienating thousands of conservatives with his Wall Street greed hurt main street dribble, people who would support him if he could get his mind around the fact that more regulation is likely to hurt, not help, the situation.
Obama is planning to increase taxes on the wealthy. If the goal of this less-than-enviable proposal were, say, to bring the fiscal deficit under some semblance of control, McCain would be in a pickle. Yet empirical studies demonstrate that governmental spending programs are notoriously inefficient. Government programs quickly fall into deficit unless one of two things happens: their funding is continuously increased at an increasing rate, or their benefits are constantly redefined to give continually less to each person. I have not witnessed McCain calling Obama out on this; he could point to any of the numerous failures of The Great Society to provide evidence for why increased government spending is not necessarily the answer. He might even get rid of some tax breaks of his own!!
One of the clearest lessons I learned in International Finance class was that monetary action is far, far more likely to be of use in times of economic recession or stagnation than fiscal policy. Monetary policy is fast-acting, while fiscal policy is notoriously slow. Indeed, the recent bailout package did not get passed quickly enough, even though it made its way through Congress in record time. I do not understand Obama's reluctance to do nothing more than emphasize the failures of the Bush administration, and by association, Republicans as group, while promising to raise taxes on the wealthy, reducing the deficit. That is a winning platform. By speaking of ending the Iraq war and starting new government programs, he illustrates both his lack of support of the surge, and alienates fiscal-conservatives who would potentially support a balanced budget. He should not bring up Iraq, becfause his record on it stinks. He voted against a workinbg strategy -- the surge -- and every time he mentions Iraq McCain will hammer him for his inexperience.
McCain should abandon this populist, anti-business mentaility and simply promise to cut useless government programs and business tax rates, attracting new business to the US and helping the economy deal with the slowdown. If only it were a perfect world...
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