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r This week marked the opening round in the fight over the direction of the U.S. economy that could determine the outcome of the presidential election, and the free market is already on the ropes.
Not too long ago, political observers were convinced that the 2008 election would be a referendum on the Iraq War. In a CNN/Opinion Research poll taken last June, Americans choose Iraq as the most important issue in determining their vote, with a 31 percent to 23 percent edge over the economy. When the same poll was taken earlier this month, it found that 42 percent identify the economy as their primary issue — double the number who choose Iraq.
Such polling has not been lost on the leading presidential contenders, with each of them giving major policy speeches on the economy this week.
On Monday, Hillary Clinton outlined a plan calling for a massive government-led restructuring of mortgages and a $30 billion fund enabling state and local governments to purchase foreclosed properties and resell them to low-income families. She also reiterated her support for a 90-day moratorium on foreclosures and a 5-year freeze on mortgage rates.
The latter measure would not only raise serious legal issues — and possibly be found unconstitutional — but it would be counterproductive. If lenders (and mortgage financiers) know that the government can arbitrarily rewrite the terms of contracts, this would make it more difficult for homeowners to obtain mortgages, and would trigger a spike in interest rates on new loans.
Yesterday, Clinton called for a 5-year, $12.5 billion job training program.
Barack Obama also spoke about the financial markets in New York yesterday, and displayed his mastery of the art of faux conciliation.
Obama ruminated on the historical conflict between government and economic freedom, lauded the free market as “the engine of America's progress,” but then blasted an “ethic of greed” and ultimately called for a “21st century regulatory framework” consisting of six parts. He also announced a $30 billion economic stimulus package.
He topped things off by telling CNBC later in the day that he supports hiking the capital gains tax, possibly to nearly twice its current rate.
ON TUESDAY, John McCain delivered an economic speech that was, in parts, far more promising for free marketers.
“I will not play election year politics with the housing crisis,” he declared. “I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”
McCain proposed making mortgage contracts simpler and more understandable to borrowers, updating accounting standards, and increasing down payments to prevent homeowners from taking on mortgages they cannot afford. He also proposed a meeting of the top mortgage lenders and urged them to come together to help cash-strapped borrowers.
But while McCain deserves some credit for rejecting the most draconian proposals of the Democrats, he still left the door wide open for some form of government intervention down the road. He said he was “prepared to examine new proposals” that were consistent with his principles.
On a conference call with reporters yesterday, McCain advisor Doug Holtz-Eakin echoed Obama, asserting that “certainly John McCain is interested in a 21st Century financial regulations system.”
Another advisor, former Hewlett-Packard CEO Carly Fiorina, emphasized that McCain still believed there was a role for government to help the “truly needy.”
When I asked Fiorina how she would define “truly needy” and why those who took out mortgages they couldn't afford should be bailed out by taxpayers anyway, she distinguished between speculators and those who are “cash-strapped” and have felt the pinch as housing prices tumble.
She emphasized that McCain wants mortgage lenders to get together to help their customers, without government intrusion.
WHILE SUCH AN approach may hold the fort for McCain while the Democrats are still focused on battling each other, once the general election is in full swing, he will be under constant attack for being out of touch for not having a plan to help poor homeowners. The media will no doubt provide an assist, with countless stories of Americans losing their homes because of predatory lenders.
The question for free marketers is, will McCain remain as reticent about government intervention if the crisis persists into the fall?
One of the best arguments free marketers have to stave off a big government rescue plan is that the overwhelming majority of lower and middle income American homeowners behaved responsibly when they took out mortgages on their homes. It simply isn't fair for them to be stuck with the bill for those who acted recklessly.
Unfortunately, the Federal Reserve Board's $30 billion bailout of Bear Stearns and resulting sweetheart deal for J.P. Morgan makes it much more difficult to make that argument. In fact, Democrats have already seized on the deal to argue for more government intervention.
“Well, if the Fed can extend $30 billion to help Bear Stearns address their financial crisis, the federal government should provide at least that much emergency assistance to help families and communities address theirs,” Clinton remarked in her speech.
In the conference call, Holtz-Eakin said this was just an example of playing politics, by choosing the figure $30 billion to make a point rather than after careful consideration of economic factors. Fiorina argued that the Fed's action was different because it was combating systemic risk.
Maybe so. But it's easy to see such subtle arguments getting lost in a heated election battle. r
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