Sunday, September 28, 2008

The Naked Emperors — John McCain

or, How a Populist Deals With Economic Difficulties

In discussing the financial crisis McCain starts off well. He says:
The financial crisis we're living through today started with the corruption and manipulation of our home mortgage system. At the center of the problem were the lobbyists, politicians, and bureaucrats who succeeded in persuading Congress and the administration to ignore the festering problems at Fannie Mae and Freddie Mac.
followed shortly by:
They institutionalized a system that rewarded forcing mortgages on people who couldn't afford them, while turning around and selling those bad mortgages to the banks that are now going bankrupt.
Note, one thing: no one was forced to borrow money to buy a home. They chose to do so because lenders were willing and they were able, and there was a rising market. That rise was artificially created by Federal policies and practices, and supported in part by the demand. Artificially low interest rates, arm-twisted lowering of credit-worthiness standards foisted on Freddie and Fannie, and — yes — the desire of some short-sighted people to make a lot of money on the situation are the roots of the problem.

Then, in now-standard McCain fashion, he goes off the rails and blames:
...the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street.
Granted, many on Wall Street are neither saints nor foresighted nor particularly interested in the long run, this is still a foolish statement. Washington creates a system that allows morally flexible men to take advantage of the situation — while they are being pressured to do so by politicians from both sides of the aisle — and they become the guilty party?

Fine, let's chastise according to their share of the blame. But keep your eye on the ball, where the root problem lies: government policies.

That, unfortunately, is something John McCain seems constitutionally unable to do. It would require too much long-term focus, an attribute he seems to lack.

His populism run amok attitude is on display here:
Our regulatory system must protect consumers and investors by punishing individuals who engage in fraud, break contracts, or lie to customers — like the predatory lenders who know you can't afford an adjustable rate mortgage, but mislead you into signing one.
There are no doubt instances where lenders, under pressure to meet CRA mandated goals, lied to potential borrowers. But individuals who borrow money are ultimately responsible for any contracts they sign. If they can't afford a loan, in the end they have the responsibility to decide.

If the signer doesn't understand the terms, he shouldn't sign until he does. They are always free to seek advice from the dozens of those around them who do understand. Even ill-educated people can read a table of figures. If it shows that an ARM interest rate may rise two years after taking out the loan, and increase the mortgage payment from $400 to $600 per month, they can always say no thanks. No one has a right to expect a guarantee that home prices will always necessarily rise, bailing him out by a sale two years later at a profit.

The Federal Government's attempt to relieve citizens from exercising their own judgment is another root cause of the fundamental problems in our society. It cuts both ways. They try to prevent some from acting on their judgment while 'protecting' others from suffering the consequences of their choices. That double-whammy violates rights and shifts the burden of bad choices to others. Immoral and impractical, times two.

Equally bad are McCain's proposed legislative solutions.
First, to deal with the immediate crisis, I will lead in the creation of the Mortgage and Financial Institutions trust — the MFI.

The underlying principle of the MFI or any approach considered by Congress should be to keep people in their homes and safe guard the life savings of all Americans by protecting our financial system and capital markets. This trust will work with the private sector and regulators to identify institutions that are weak and fix them before they become insolvent.

The MFI is an early intervention program to help financial institutions avoid bankruptcy, expensive bailouts and damage to their customers. This will get the Treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after another.
The underlying principle of any government institution should definitely not be: "keep[ing] people in their homes." Whether or not a person should retain their home can only, morally and practically, be determined by the free market. If they can afford it, excellent. If not, that's bad luck but nothing the government should be involved with. That sort of involvement is exactly what led to the problem in the first place and you don't solve a problem by doing more of the same.

The danger is reinforced by touting "early intervention." It's hard to conceive of any riskier plan than having the Federal government anticipate what will succeed or fail, and by how much. Not only is their track record very bad in this regard but they are simply too remote, too slow, and, frankly, too stupid. As Ronald Reagan famously said, "The best minds are not in government. If any were, business would hire them away."

I agree, however, that the Treasury, the Fed, and everyone else in DC needs to get out of crisis mode. That would be a lot easier if they would stop creating them.

That won't happen so long as McCain and anyone else with influence believes this:
Finally, the Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts. The Fed needs to return to protecting the purchasing power of the dollar. A strong dollar will reduce energy and food prices. It will stimulate sustainable economic growth and get this economy moving again.
Muddle-headed. They do need to get out of the bailout business. And a strong dollar is definitely a good thing. But, the Federal Reserve's practice of "managing our money supply" is one of the most serious elements in the whole debacle. Pushing up and down interest rates, inflating the money supply then contracting it, are exactly why we see these boom and bust cycles in the first place. This has been known since the 1930s. Writing in 1932, F.A. Hayek, Nobel Laureate in economics, said:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end.
It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression. We must not forget that, for the last six or eight years, monetary policy all over the world has followed the advice of the stabilizers. It is high time that their influence, which has already done harm enough, should be overthrown. [Hat tip, Not PC]
The Fed's policies, no matter how well directed will not and can not "...grow this economy, create millions of jobs and bring opportunity back to Americans," as McCain implies. Only American free enterprise, i.e. the private activity of millions of individuals left free to risk, to invest and create can do that.

Only after he and the other leaders in Washington — and more importantly, the American people — learn this will the problem finally get solved.


Ellen said...

It's hard to believe that this all started back when I was in high school - talk about trickle down politics.

Why is it that people turn a blind eye to the fact that the CRA wa nothing more than affirmative action distributed through mortages?

When will the government (liberals) learn that when you "give things to people" without them having to earn it, you murder our nation?

And here are the people who work, who will once again be left holding the bag. A lot of those people are going to get to hold onto their homes anyway - people like me, who are in danger of losing theirs because of the economy, are just SOL I guess.

Jeff Perren said...

"It's hard to believe that this all started back when I was in high school - talk about trickle down politics."

Isn't it amazing?

Really, though, it started long before that, even though this crisis had a more immediate cause. The ideas that are responsible for the mess we are now facing came into the mainstream around the turn of the 20th century and we have seen boom and bust ever since.

Henry Hazlitt's Economics in One Lesson, first published in 1946 describes a lot of it in simple terms. If you haven't read it, it's a great resource.