What the Democrats have done thus far this week is nothing short of shameless, and I hope that American voters this fall will consider turning control of the House and Senate to a chastened GOP. Second, Barack Obama has shown us in real life his response to a 3AM call on an economic crisis, and it was incompetent, outrageous, and unconscionable.
Greed or An Accounting-Related Problem?
First, let us describe the context of the problem: bad mortgages in an illiquid environment. A lot of what's going on is an accounting rule called "mark-to-market". In essence, accounting requires a fair statement of financial assets. Suppose you bought, in the housing bubble, a house for the price of $300K. You had a real estate agent and a mortgage lender basically coaxing homebuyers to buy more house than they could afford with gimmicks like little or no money down and a teaser mortgage rate--which the homeowner could barely afford. Now the housing bubble pops. The homeowner is facing skyrocketing food and energy costs. All of a sudden the mortgage interest rate bumps up. The homeowner defaults on the mortgage. The bank now takes the possession of the house. At this point, the bank or mortgage owner has to book the current market value, likely well below list price, given ongoing weakness in the housing market.
If we look at some year-to-year average prices, we find a house price has gone down about 9%. Now when you look a bundle or pool of mortage-backed securities, you're looking at two things: how many homeowners will default on their loans (currently less than 10%), and what can you get for the property. Bill Gross of PIMCO says distressed loans/securities can run from 20 to 80 cents to the dollar. He recently paid 65 cents and expects a double-digit profit. Now Fed Reserve chairman Bernanke expects to pay above-market prices to help banks recapitalize. Obviously banks would not realize a loss at all if the federal government paid dollar-for-dollar. But technically it's possible for the taxpayer to gain, depending on the price the government pays and when the homes are sold (with the federal government able to wait out the period for the market to resume normal liquidity).
However, so long as the banks are forced to write down their assets and book losses under current rules, particularly under illiquid time periods, banks could find themselves undercapitalized and out of business. We need to find a viable method of valuing mortgages and securities that doesn't throw the majority of banks into crisis with over 90% of mortgages in good shape.
Other Conservative Objections
Newt Gingrich blasted the bailout plan because of the mark-to-market accounting rule (for long-term assets like mortages) [he talks about using a 3-month rolling average], suggests 2-year suspension of capital gains taxes (the House Republican Study Committee argues doing this to flesh out bad assets, offering loans to troubled companies at Treasury + 2% vs. the bailout, stabilize the dollar (e.g., offshore drilling) and argues Sarbanes-Oxley reforms (enacted in the aftermath of the Enron and other scandals) have been ineffective on detecting the current crisis and extremely expensive. He also argues that Democratic caps on management compensation would be counterproductive, since talented people can more than pay their way. Conservatives also are concerned of setting a bad precedent, and the government competing with or otherwise micromanaging the private sector.
McCain's Co-Sponsorship of Federal Housing Enterprise Regulatory Reform Act of 2005
Given the Obama's campaign attempt to argue McCain is a dogmatic deregulator and the whole question of Fannie Mae and Freddie Mac (including accusations about campaign chief Rick Davis' ties to a Fannie Mae contractor), John McCain's comments on May 25, 2006 are telling:
Mr. President, this week Fannie Mae's regulator reported that the company's quarterly reports of profit growth over the past few years were "illusions deliberately and systematically created" by the company's senior management, which resulted in a $10.6 billion accounting scandal....The report of financial misconduct at Fannie Mae echoes the deeply troubling $5 billion profit restatement at Freddie Mac. The OFHEO report also states that Fannie Mae used its political power to lobby Congress in an effort to interfere with the regulator's examination of the company's accounting problems...For years I have been concerned about the regulatory structure that governs Fannie Mae and Freddie Mac--known as Government-sponsored entities or GSEs--and the sheer magnitude of these companies and the role they play in the housing market...I join as a cosponsor of the Federal Housing Enterprise Regulatory Reform Act of 2005, S. 190, to underscore my support for quick passage of GSE regulatory reform legislation. If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole.
I wonder why the McCain campaign doesn't point out Obama's "economic expertise" and failure to support this regulatory reform? And then point out Obama was #2 overall target of contributions from the relevant PAC's and employees?
Review of the Week's Political Events
The Democrats know full well that as the party in power, they bear primary responsibility; if the bailout doesn't happen and it results in the stock market and economy tanking, throwing millions of people out of work, they are dead meat coming subsequent elections.
From a political standpoint, they are resorting to one of the oldest political techniques known: co-opt the opposition. Among other things, the "bailout" is probably the most volatile issue since immigration or Clinton's impeachment. The far left sees it as bailing out greedy Wall Street. The conservative right has long resented any branch of government essentially picking winners and losers in the private sector, feels that these half-measures may not work and may simply postpone the inevitable. They also dislike ceding power of the pursestring to the Treasury Secretary with limited or no oversight.
Senate Majority Leader Harry Reid, asked what actions Congress can take, said, bluntly, "No one knows what to do. We are in new territory here. This is a different game. We're not here playing soccer, basketball or football, this is a new game and we're going to have to figure out ho to do it."...McCain holds the key to such a bipartisan vote, according to Reid, because Republicans are likely to defer to his position on a bill that holds political peril...According to a Democratic aide familiar with the discussions, Reid told Paulson this week that "if McCain didn't come out for this thing and come out for it quickly, it was going to begin bleeding Republican votes." Democrats "have a very real concern that opposition [from McCain] is going to drive away potential Republican votes," this aide said...Harry Reid said, "The Republican nominee for President needs to tell us on where he stands on what we should do."... Reid was celebrating when McCain indicated some support for a bailout: "I got some good news in the last hour or so . . . it appears that Sen. McCain is going to come out for this."Republican Senator Coburn, a McCain supporter who has worked with Obama on a budget transparency bill, suggested Tuesday evening Obama and McCain come out with a joint statement for principles for the bailout. Obama unsuccessfully attempted the next morning to call McCain. In the meanwhile, McCain contacted Republican leadership in the House and Senate and got briefed on party opposition. He returned Obama's call and suggested that they both return to Congress and postpone the Friday debate.
Shortly thereafter, McCain made a public statement announcing temporary suspension of his campaign, saying: "I do not believe that the plan on the table will pass as it currently stands, and we are running out of time." [This is based on Fed Reserve chairman Bernanke's assessment of dire consequences if action is not taken in the short term.]
And Obama's response? A refusal
"It is going to be part of the president's job to deal with more than one thing at once," Obama said at a news conference late yesterday afternoon called in response to McCain's appearance. "I think there's no reason why we can't be constructive in helping to solve this problem and also tell the American people what we believe, and where we stand, and where we want to take the country... It's my belief that this is exactly the time when the American people need to hear from the person who, in approximately 40 days, will be responsible for dealing with this mess." Obama said he was in touch daily with Pelosi, Reid and Paulson and said, "They can call me if they need me."
[Attention, Senator Reid! Obama votes "NOT PRESENT". Attention, Mr. Empty Suit! Remember Mr. Warren Buffett, your favorite $40B supporter, whom you claim as an economic adviser? He says the bailout the right thing to do, the crisis being an economic Pearl Harbor. And YOUR response to a Pearl Harbor, you clever post-partisan leader, so boastful of your bipartisan leadership, the annointed leader of the Democratic Party, is to phone in to a couple of Congressional Democrats and recite verses from the song "Ain't No Mountain High Enough"? And you insult the one man, John McCain, whom can kill the bill in 2 minutes with House Republicans, of not being able to walk and chew gum at the same time? And after ducking 10 townhall meetings and additional debates wanted by McCain, and decisively loosing the Saddleback Civic Forum, you accuse him of wanting to duck a debate with you on foreign policy, one of his strengths? And let's get this straight--given an economic crisis, on supposedly a strong suit for Democrats and Obama (and we have already read Democratic Majority Leader Reid's expertise and confidence in dealing with this unprecedented problem), Obama decides, rather than working towards a solution with possibly the health of the global economy on the line and simply postponing the debate, it's more critical to hold the debate as scheduled. Is this showing leadership in a crisis and the kind of flexibility America needs from its leaders? Obama decides now is the time to play a political game of chicken with McCain? What is he, in fifth grade?]
"It would not be helpful at this time to have them come back during these negotiations and risk injecting presidential politics into this process or distract important talks about the future of our nation’s economy. … We need leadership; not a campaign photo op.”
A publicity stunt? The only problem is--Harry Reid forgot all about House Republicans.
