As fate would have it, the 2008 presidential campaign is turning not on whether the war in Iraq is yielding better results thanks to the success of the John McCain-backed surge, but on the root causes of a massive financial meltdown that has led to global bank runs, failing companies, and a blank-check bailout plan that will end up costing U.S. taxpayers more than a trillion bucks. It’s at this point that supporters of the free market — surely there are plenty of us left — who desperately want the Republican candidates to make a sophisticated argument about what happened and how to fix it. At times John McCain touches on this point, but his self-described lack of interest in economics doesn’t enable him to truly engage the debate.
Based on the latest Republican talking points, I’ve learned that Barack Obama has a nefarious association with a 1960s-era terrorist, which suggests that the Democratic candidate harbors deep leftist sentiments. That might be frightening. Consider the possibilities. A President Obama might socialize the nation’s financial system or … oh never mind. That already happened last week. In my view, the best hope McCain had to surge ahead in these last weeks of electioneering would have been to play the part of a real maverick and oppose the bailout, point out the real causes of the meltdown, and argue that the market needs to be left to sort itself out, which is how markets always work.
It’s too late on the first point, but there’s still room to engage the debate on the second and third points. He still can counter some of the self-serving arguments coming from cheap populists such as Rep. Barney Frank, D-Mass. As the Associated Press reported, “Frank said Monday that Republican criticism of Democrats over the nation’s housing crisis is a veiled attack on the poor that’s racially motivated.” Republican members of Congress have pointed to the Community Reinvestment Act — the creation of the Carter administration, which was expanded under Bill Clinton — as a source of the subprime housing mess.
The GOP’s criticism is right, which is why Democrats want to make such discussions taboo. An October 5 New York Times report makes the Republican point:
Congress was demanding that [former Fannie Mae chief executive Daniel] Mudd help steer more loans to low-income borrowers. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans. …
[T]he company announced in 2000 that it would buy $2 trillion in loans from low-income, minority, and risky borrowers by 2010. …
Between 2001 and 2004, the overall subprime mortgage market — loans to the riskiest borrowers — grew from $160 million to $540 million. …
Communities were inundated with billboards and fliers from subprime companies offering to help almost anyone buy a home.
The article even quotes Rep. Frank saying, “I’m not worried about Fannie and Freddie’s health, I’m worried that they won’t do enough to help out the economy.” No wonder he protests so much.
Obviously, there are many reasons — and culprits, including President Bush, who supported CRA — for the meltdown, ranging from cheap money to poor industry practices. But a key reason is a federal government policy that practically begged lenders to make ridiculous loans. Under CRA rating standards, to be rated “outstanding” a bank should have “an excellent record of serving the credit needs of highly economically disadvantaged areas.”
Is it too much to expect the GOP ticket to figure out a way to make this case? Shouldn’t a maverick be willing to level with the public, not only about corporate America’s role in this disaster and the federal government’s role, but also about the role played by average Americans?
“The profiteering was not just the result of a few thousand scoundrels on Wall Street or in Washington, as greedy and as bonus-hungry as many of them no doubt were,” argued the Hoover Institution’s Victor Davis Hanson. “Look at the housing market as a sort of musical chairs in which everyone profited as long as he grabbed a seat when the music stopped. Then those left standing — with high-priced loans and negative equity when the crash came — defaulted and stuck taxpayers with debt in the billions of dollars. But until then, most owners who had sold homes cashed out beyond their wildest dreams.”
I recall those water-cooler conversations where everyone bragged about the astounding increases in the values of their homes. How many California homeowners didn’t tap the equity in their home to finance new granite counter kitchens, bathrooms, and swimming pools? In the formerly growing desert communities of Southern California, homes sold for nearly $300,000 at the height of the market but can be snapped up now for about $100,000. When the bubble burst, the “owners” simply walked away and left the lenders and now the taxpayers holding the bag.
But there’s still time for Sen. McCain to engage the public with some of this straight talk, although the time is running short.
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