Tuesday, September 16, 2008

New politics - same as the old politics

So I am bit poorer today than I was last night and Obama wants to make political hay. It may be possible to do so, but I am still waiting for a substantive argument. He says that the problem is:

It's the same philosophy we've had for the last eight years, one that says we should give more and more to those with the most and hope that prosperity trickles down to everyone else," Obama said. "It's a philosophy that says even commonsense regulations are unnecessary, unwise. One that says we should just stick our heads in the sand and ignore economic problems until they spiral into crisis."

That's just bloviation. The financial industry was hardly unregulated and, indeed, one could make the case that it was government intervention in the markets - a fed fund rate that was too low and implicit government guarantees that created a moral hazard - that contributed to the mess.

But put that side. What regulations were suspended during the Bush administration that contributed to the subprime difficulties? I have seen frequent reference to a 1999 bill supported by McCain's former economic advisor and signed into law by Bill Clinton, but no attempt to explain why - nine years later - the bill created the problems we see today.

Obama's reference to "giving more and more to those with the most" is, I suppose, a reference to reductions in marginal tax rates. Putting aside the fact that those changes have actually seen wealthy taxpayers foot more of the income tax bill than they did before, how did that cause the collapse of Lehman Brothers?

Obama criticizes McCain for voting against minimum wage increases. Again, let's forget the rather well accepted idea that minimum wage increases tend to reduce low-skill employment, what does that have to do with this?

Obama also said today that the administration had encouraged huge bonuses to CEOs. How did it do that? And how did those bonuses cause the problem?

I don't pretend to understand the subprime meltdown, but it seems to me that the key disconnect was between those who originated mortgages and thos who bought them (a practice that did not originate in the Bush administration). Notwithstanding mandated disclosures to borrowers, people bought houses that they could not afford. That's one set of problems, although I'm not so sure that its a problem of insufficient regulation.

A lot of the public discussion of this ends there. Those big bad capitalists lent money to people that they knew could never pay it back.

But, of course, no one would knowingly lend money to someone who couldn't repay it. The problem seems to be that the people who originated the loans sold them to someone else.

And therein lies the problem, The originators sold a bunch of lousy credit in the secondary market to big rich and sophisticated buyers who should have known better. It may be that there is a regulatory solution to this, but it is unlikely to have much to do with the economic populism espoused by Obama.

I know that I am supposed to accept on faith the notion that Obama represents some kind of new unifying politics, but, tell me, why is this anything other than standard demagoguery?


AnotherTosaVoter said...

This is a great post with which I agree, in general.

However, didn't members of the other party make political hay out of the downturn of 2000, saying it was caused by the incumbent President's policies and that new policies, in the form of massive tax cuts, were required to save the day?

I'm pretty sure they did.

There's partisanship for you.

Anonymous said...

Let's see, democrats control both houses and we have a bad economy.

Those darn republicans.

Rick Esenberg said...


I'm really not sure that it was quite like that because I'm not sure there was a widespread perception of an economic downturn then.

Certainly, though, Republicans have played this game. Reagan started the quadrennial question of "are you better off ...."

I certainly don't think that its wrong to argue that tax cuts or increases will grow the economy. There is an argument there, whatever we think of it.

But I can't find an argument in what Obama is saying.

Dad29 said...

The sub-prime/Alt-A mortgage problem has plenty of complexity.

By and large, banks and brokers make loans which are re-sold in packages. The packages are sold to folks like Lehmann, which then re-package the loans into bonds--those bonds are sold to investors looking for returns.

It is important to note that one cannot re-sell loans unless they meet the criteria established by the buyers (Lehmann, Bear Stearns, et.al.). IOW, some buyers were willing to purchase 'no-doc/low-doc' paper; others were not.

There were bad guys. The commissions and fees paid to originators were extremely lucrative--so long as they originated loans.

Banks did not dream up neg-am/arm (etc.) loans all by themselves; again, these were offered because SOMEBODY offered to buy the paper.

Fan/Fred played the game, too--under Congressional direction.

What it came down to was jacking the returns. There are buyers who are looking for more return (e.g., the WFB Schools) than is afforded by Treasuries.

The mystery to me is this: how could the ultimate buyers think, for 1 second, that higher reward was detached from higher risk?

When in the history of finance has THAT been true?

James Rowen said...

Would you be willing to address the fact-checking regarding McCain's ads about Obama's tax plans?