Some thoughts on the economy and the presidential election
On November 4, American voters go to the polls to elect a new president. What we have seen leaves me with an obvious choice. My vote is for Barack Obama.
The most important decision that a presidential candidate can make prior to the election is the selection of a running mate.
There was an article in Time back in July, that offered a glimpse into the personalities and potential leadership style of Barack Obama and John McCain, by looking at the forms of gambling they partake in with their own money. Obama, according to the article, is a rather studious and cautious small-stakes poker player. McCain enjoys high-stakes craps.
This is borne out by the candidates’ selections of running mates: Delaware Sen. Joseph Biden and Alaska Gov. Sara Palin are Obama’s and McCain’s respective running mates.
Biden is a 36-year veteran of the Senate who is very well versed in foreign policy, is not afraid to speak his mind, and would be a capable president if it should become necessary.
Palin, on the other hand, has served six years as a small-town mayor and two years as governor; before this election, she had never stood for election to federal office. The last member of a winning presidential ticket who had never previously run for federal office was Spiro Agnew in 1968. (Ronald Reagan was an unsuccessful candidate in the 1976 Republican presidential primaries; Bill Clinton was an unsuccessful candidate for the House of Representatives in 1974; George W. Bush was an unsuccessful candidate for the House of Representatives in 1978.) The fact that Palin has no experience at the federal level suggests a Pandora’s box if she had to assume the presidency, a possibility that is of greater significance given McCain’s age and medical history.
Overall, Obama chose well with Biden. McCain rolled snake-eyes with Palin. If McCain’s goal was to appease the right wing of the Republican Party, there were quite a few other choices available to him from the right wing whose experience at the federal level that would be respected by the left.
That being said, we now look at the primary issue in this election: the economy.
As of this writing, we are witnessing an economic crisis of proportions not seen since the 1930’s. The crisis was precipitated by a housing bubble precipitated by the Federal Reserve’s reduction of the federal funds rate to 1% several years ago compounded by the issuance of mortgage loans to borrowers whose credit histories indicated a much higher propensity than normal to default on the loans. After the top of the bubble had been reached, these loans started souring, and the foreclosures started to flood the market with excess housing inventory, driving down home values, and cascading the problem.
The Federal Reserve responded by reducing the federal-funds rate from 5.25% to, as of October 24, 2008, 1.5%, and reducing the discount rate, at which it lends to commercial banks, from 6.25% to 1.75%.
However, this did not cause mortgage interest rates to go down, which would have helped stop or at least slow down the decline in housing prices.
The resulting losses on subprime mortgages caused a number of large institutions to collapse or be merged out of existence. The casualty list includes, among others, Bear Stearns, IndyMac Bank, Lehman Brothers, AIG, Washington Mutual, Merrill Lynch, Wachovia, and National City. Others are expected to follow.
However, the crisis is appearing to have not been a liquidity crisis but a solvency crisis. A recent article from the Wall Street Journal offers a succinct analogy: "Imagine that you are playing poker with 10 people and that you learn that a minority of them is broke and would not pay you if they lose. You don't know, however, who the ones are who won't pay. In this environment, the risk of losing would be too high even if you know that most of the players are perfectly sound financially and would pay up if they lose.
"In this environment, any rational card player would stop making bets until the true solvency position of each player is revealed and the bankrupt ones are expelled from the game. Having insolvent players sitting at the table spoils the game."
Indeed it does. This is a large part of why the London Interbank Offered Rate (LIBOR) has become decoupled from the federal funds rate. Banks are afraid to lend to one another; they question each other’s solvency.
First, we must get at the crux of the problem by stabilizing housing prices. Once housing prices are at least stable, the mortgage industry will start writing new loans.
Second, we need to rethink our financial regulatory structure. Right now, we have a large number of regulatory fiefdoms that institutions can play off of one another; the FDIC, the Federal Reserve, the state banking regulators, the state insurance regulators the Office of the Comptroller of the Currency, and the Office of Thrift Supervision come to mind. Instead, we need a single regulatory apparatus that meets the needs of our economy and our financial institutions, be they commercial banks, investment banks, brokerage firms, insurance companies, credit unions, mutual funds, pension funds, and hedge funds.
We must recognize that free-market capitalism, left unregulated or insufficiently regulated, will eventually self-destruct. The key is to regulate in such a manner that free-market capitalism is protected from its own worst enemies.
However, we must realize that the last eight years have seen an administration that has been generally disinclined toward regulation in general.
We must also consider McCain’s history; he got caught up in the 1980’s in the Keating Five scandal. Charles Keating what the CEO of Lincoln Savings, a struggling thrift at the time this happened. His relationship with five senators allowed him to keep regulators at bay, allowing Lincoln’s condition to worsen and increasing the cost to taxpayers for the cleanup. That being said, I have no confidence in McCain’s willingness to provide the necessary regulatory framework.
And now we get to some of the rhetoric we have heard over the last couple weeks. We have Palin’s comments about the “real America” and we have comments from Minnesota Rep. Michele Bachmann, who called upon the news media to conduct an investigation of the entire congressional membership to determine who is pro-America and who is anti-America. These comments remind me of Abraham Lincoln’s statement in 1858 that “a house divided against itself cannot stand.” It is clear that the polarization of our country is reaching a point where our country will be unable to take such further polarization.
We cannot afford more dividers; we need candidates who will bring unity. We need a regulatory system that protects the system from its worst excesses. A vote for McCain is a vote for more of the same; any claim that McCain and Palin are mavericks is absurd.
The most important decision that a presidential candidate can make prior to the election is the selection of a running mate.
There was an article in Time back in July, that offered a glimpse into the personalities and potential leadership style of Barack Obama and John McCain, by looking at the forms of gambling they partake in with their own money. Obama, according to the article, is a rather studious and cautious small-stakes poker player. McCain enjoys high-stakes craps.
This is borne out by the candidates’ selections of running mates: Delaware Sen. Joseph Biden and Alaska Gov. Sara Palin are Obama’s and McCain’s respective running mates.
Biden is a 36-year veteran of the Senate who is very well versed in foreign policy, is not afraid to speak his mind, and would be a capable president if it should become necessary.
Palin, on the other hand, has served six years as a small-town mayor and two years as governor; before this election, she had never stood for election to federal office. The last member of a winning presidential ticket who had never previously run for federal office was Spiro Agnew in 1968. (Ronald Reagan was an unsuccessful candidate in the 1976 Republican presidential primaries; Bill Clinton was an unsuccessful candidate for the House of Representatives in 1974; George W. Bush was an unsuccessful candidate for the House of Representatives in 1978.) The fact that Palin has no experience at the federal level suggests a Pandora’s box if she had to assume the presidency, a possibility that is of greater significance given McCain’s age and medical history.
Overall, Obama chose well with Biden. McCain rolled snake-eyes with Palin. If McCain’s goal was to appease the right wing of the Republican Party, there were quite a few other choices available to him from the right wing whose experience at the federal level that would be respected by the left.
That being said, we now look at the primary issue in this election: the economy.
As of this writing, we are witnessing an economic crisis of proportions not seen since the 1930’s. The crisis was precipitated by a housing bubble precipitated by the Federal Reserve’s reduction of the federal funds rate to 1% several years ago compounded by the issuance of mortgage loans to borrowers whose credit histories indicated a much higher propensity than normal to default on the loans. After the top of the bubble had been reached, these loans started souring, and the foreclosures started to flood the market with excess housing inventory, driving down home values, and cascading the problem.
The Federal Reserve responded by reducing the federal-funds rate from 5.25% to, as of October 24, 2008, 1.5%, and reducing the discount rate, at which it lends to commercial banks, from 6.25% to 1.75%.
However, this did not cause mortgage interest rates to go down, which would have helped stop or at least slow down the decline in housing prices.
The resulting losses on subprime mortgages caused a number of large institutions to collapse or be merged out of existence. The casualty list includes, among others, Bear Stearns, IndyMac Bank, Lehman Brothers, AIG, Washington Mutual, Merrill Lynch, Wachovia, and National City. Others are expected to follow.
However, the crisis is appearing to have not been a liquidity crisis but a solvency crisis. A recent article from the Wall Street Journal offers a succinct analogy: "Imagine that you are playing poker with 10 people and that you learn that a minority of them is broke and would not pay you if they lose. You don't know, however, who the ones are who won't pay. In this environment, the risk of losing would be too high even if you know that most of the players are perfectly sound financially and would pay up if they lose.
"In this environment, any rational card player would stop making bets until the true solvency position of each player is revealed and the bankrupt ones are expelled from the game. Having insolvent players sitting at the table spoils the game."
Indeed it does. This is a large part of why the London Interbank Offered Rate (LIBOR) has become decoupled from the federal funds rate. Banks are afraid to lend to one another; they question each other’s solvency.
First, we must get at the crux of the problem by stabilizing housing prices. Once housing prices are at least stable, the mortgage industry will start writing new loans.
Second, we need to rethink our financial regulatory structure. Right now, we have a large number of regulatory fiefdoms that institutions can play off of one another; the FDIC, the Federal Reserve, the state banking regulators, the state insurance regulators the Office of the Comptroller of the Currency, and the Office of Thrift Supervision come to mind. Instead, we need a single regulatory apparatus that meets the needs of our economy and our financial institutions, be they commercial banks, investment banks, brokerage firms, insurance companies, credit unions, mutual funds, pension funds, and hedge funds.
We must recognize that free-market capitalism, left unregulated or insufficiently regulated, will eventually self-destruct. The key is to regulate in such a manner that free-market capitalism is protected from its own worst enemies.
However, we must realize that the last eight years have seen an administration that has been generally disinclined toward regulation in general.
We must also consider McCain’s history; he got caught up in the 1980’s in the Keating Five scandal. Charles Keating what the CEO of Lincoln Savings, a struggling thrift at the time this happened. His relationship with five senators allowed him to keep regulators at bay, allowing Lincoln’s condition to worsen and increasing the cost to taxpayers for the cleanup. That being said, I have no confidence in McCain’s willingness to provide the necessary regulatory framework.
And now we get to some of the rhetoric we have heard over the last couple weeks. We have Palin’s comments about the “real America” and we have comments from Minnesota Rep. Michele Bachmann, who called upon the news media to conduct an investigation of the entire congressional membership to determine who is pro-America and who is anti-America. These comments remind me of Abraham Lincoln’s statement in 1858 that “a house divided against itself cannot stand.” It is clear that the polarization of our country is reaching a point where our country will be unable to take such further polarization.
We cannot afford more dividers; we need candidates who will bring unity. We need a regulatory system that protects the system from its worst excesses. A vote for McCain is a vote for more of the same; any claim that McCain and Palin are mavericks is absurd.