Fear factor: Obama, McCain and the credit crunch

They gave nice speeches, inspired their conventions and hit the road. What they didn't do -- neither John McCain nor Barack Obama -- was dare to say how they will solve the most serious economic problem facing the country: the deepening credit crunch. They didn't even dare to mention it.

It is bad out there and getting worse: banks are in trouble and are unable to raise capital. The current Federal Reserve, and the Bush administration, have already taken unprecedented steps to back up and prop up the nation's financial system. And yet the crunch deepens. Fannie and Freddie can't raise money -- the Bush administration is reportedly working on yet another weekend rescue plan.  Detroit wants a $50 billion bailout. What would they do, Obama and McCain?

No mention in Obama's speech. No mention in McCain's. Why not? Mortgage broker/pundit Lou Barnes takes a stab:

Neither candidate has a word to say, which is understandable, as many money pros still don’t get the nature and magnitude of the problem. At nomination, which candidate would like to explain to the people these choices ahead: If we guarantee Fannie and Freddie, what parts -- stock, bonds, preferred, subordinated? Then, which banks do we save, and their parts? If we save rich financial guys, what of Ford, Chrysler, and GM, and their retirees? What of the impulse to save homeowners, no matter how foolish, no matter how terribly unfair to the prudent but unlucky?

Not one of the four nominees has financial-market experience or evident knowledge. Better not to talk. However, election-cycle paralysis may be overtaken by events.

Good questions. Which banks would you save? Which troubled companies? How? This is likely to be the first crisis faced by the next president. Is it too much to expect their thoughts on it?

--Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo Credit: Los Angeles Times

Comments

[Rational Renter]

The sad truth is that there is no fix for this problem. It either has to work itself out on its own or we can intervene and destroy the value of the American dollar.

What we NEED is new regulations to prevent these credit bubbles from happening again. No more consolidation among financial institutions, for starters.

[Nick]

They are not saying anything for different, but equally valid reasons, imho.

McCain isn't saying anything because his plan is more/less the right idea, but very politically unpopular: basically, let the market sort it out, don't bail out anyone (or do the minimum necessary to keep the economy going), and focus on creating jobs and not suffocating businesses. Unfortunately, people in America have a handout expectation, so saying you would not give people handouts is politically bad.

Obama isn't saying anything because his plan is to print money and give it to everyone: banks, GSE's, fraudsters, speculators, lower class, middle class, illegal aliens, anyone out of work, etc. He can't be too vocal about it either, though, cause the more specific he is the more he runs the risk of people seeing his plan for the giant socialist and currency-destroying debacle that it would be. Moreover, someone might realize that without the businesses his plan proposes to tax into non-existence, the government would have no more money coming in, and the emperor would be revealed to have no clothing, so to speak.

Both are perfectly valid reasons to be silent on the issue of the economy, imho.

[AKK]

Candidates not addressing real issues? Say it ain't so!

[sunsetbeachguy]

I am with Tanta and Rational Renter.

There isn't a solution, the bed was made during the bubble, now its night and idiots don't want to sleep in it.

Can the government stop the earth's rotation?

Neither can it "save" the bubble.

Capitalism without failure is like religion without sin.

[amir]

I'm with Nick on this one.

Am I showing my bias? Probably.

[directfitz]

Obama has addressed this directly. Your statement is misleading. From his site.

Protect Homeownership and Crack Down on Mortgage Fraud
Obama will crack down on fraudulent brokers and lenders. He will also make sure homebuyers have honest and complete information about their mortgage options, and he will give a tax credit to all middle-class homeowners.
Create a Universal Mortgage Credit: Obama will create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief. This credit will provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.
Ensure More Accountability in the Subprime Mortgage Industry: Obama has been closely monitoring the subprime mortgage situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama's STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.
Mandate Accurate Loan Disclosure: Obama will create a Homeowner Obligation Made Explicit (HOME) score, which will provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan.
Close Bankruptcy Loophole for Mortgage Companies: Obama will work to eliminate the provision that prevents bankruptcy courts from modifying an individual's mortgage payments. Obama believes that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.

[renter2]

I would say let the markets work themselves out. During 2005, Freddie and Fannie, the banks, and everyone else wanted to stay as far away from the Government as possible. Why??? BECAUSE THEY WERE MAKING KILLER PROFITS!!!! Now that the tables have turned and their ponzi scheme is no longer working, they all want a Gov. Bailout??? So if I go to Vegas this weekend and lose my life savings, will the Gov. bail me out by reimbursing me? I don't understand why companies in a capitalistic country like the US are demanding bailouts. Let the banks fail, Indymac already did, the FDIC stepped in and took over. After the markets take care of itself, we will see who the responsible companies were, and the strong will survive. As far as the American auto makers??? GM gave China all of their technology so that they could build and sell cars there, and they still can't stay profitable??? Japanese car companies employ almost as many Americans as the big 3 do. The big 3 were only making profits from their big cars, nice forecasting on their part... Let them fail, then maybe they'll get bought out by a better company that will turn them around. NO BAILOUTS PLEASE.

[Porchie]

Why are we wasting time about this when there's still 48 hours of air left in the Palin "America's Sweetheart" Mooseburger balloon?

[peteviles]

directfitz writes, "Obama has addressed this directly."

Thanks, direct. If he has directly and frankly addressed the credit crunch -- the likely failure of banks, the likely bailout of Fannie and Freddie, the inability of banks to raise money, the likelihood that the problem will get worse -- I'd be happy to publish what he's said. What you posted does not address the credit crunch at all.

[Tom Lindmark]

Good article and comments. A question.

Even if either candidate tackled the issue would the general public be able to understand the complexities and nuances inherent in the issues and problems.

Remember, Adlai Stevenson tried twice to frankly address the issues and look where it got him.

[Nick]

I'd go a step further than Peter, and try to summarize Obama's website plans in "minimal-spin" language:

- Print money, give to homeowners
- Print money, give to lawyers (existing law already makes fraud illegal, duh)
- Print money, give to a new government entity to develop a new score to tell people what they already knew (can't pay a 5/1 neg-am to maturity, duh)
- Allow people in bankruptcy to keep houses while reducing their debt, thus taking money from evil banks and giving it to downtrodden homeowners

Not only does this not address anything related to the credit crunch, as Peter points out, but as far as I can tell it's pretty much exactly what I said his plan was in a microcosm. On the other hand, I do appreciate the concrete example to demonstrate my point. :)

[Radical Raul]

Very simple:

Hang the rich.

[BC]

As good ol' Jack Nicholson says: "You can't handle the truth."

Although we can always demand more out of these public servants, I don't realistically expect a politician that is in the middle of a campaign to actually call a spade a spade.

I can't even tell some of my friends or family the truth, as their eyes glaze over and they think I've lost my mind.

Everyone wants their big houses, big cars, big TVs, entitlements programs, and American Idol, and anyone who tells them that they can't have those things is about as likely to get elected as you or I.

Frankly, Americans can't handle, understand, or be bothered by the truth... take your pick.

[MkeC]

Nick,

Here is McCain's Plan with no spin:

- Print Money give it to Georgia and Iraq. Let Americans Twist in the wind.

[Rational Renter]

With all this "Obama's going to print money" talk, has anyone considered how much money we will save when we end the occupation of Iraq? Not that I agree with his planned policies to intervene in the housing market, but he will surely get us out of Iraq sooner than McCain, and therefore balance the budget sooner than McCain.

[Hugh Jorgan]

What steps do I think the next President should take?

First priority are banks - not hedge funds, not insurance companies, not Wall Street brokerages, not mortgage-only brokers like Countrywide - real brick & mortar banks. Make sure the real banks are solvent.

Second, real manufacturers. Companies that actually make something customers want to buy. These companies need access to capital in order to expand, and put people to work. Don't over burden our manufacturing base with punitive taxes, or unfunded healthcare mandates.

Third raise interest rates slightly - 0.25% or less - this will bring in foreign capital, and strengthen the dollar, but not so much as to make our goods non-competitive.

There they are, 3 broad general steps that I think the next President needs to take.

[AR]

@Nick

It's funny that Republicans criticize Obama's plan to tax corporate America in an equitable fashion as the gov't currently taxes the American workforce - the problem as you see it is that the American corporate income tax rate is already 35%, second-highest in the world behind only Japan, right? Right.
Well, the problem as I see is that corporate America's K-Street Tom DeLay/John Boehner/PhRma/Trent Lott/etc. etc. lobbyists have inserted so many loopholes (see: Cayman Islands tax shelter) into the tax code that 2/3 of American companies paid NO INCOME TAX last year.

(If only me and my neighbors could get that kind of treatment from Uncle Sam...)

So much for the"second-highest corporate income tax rate in the world".
I wish I could get either a tax loophole for myself OR have corporate America pay at least their fair share, instead of CLOSE TO NOTHING.
Since the former is somewhat unproductive for society, I'm going with the latter, and that's why this independent is voting for the Obama/Biden '08 ticket!

[lark]

The problem is not with the candidates but with Americans, who love to believe they are richer than they are (so they're in debt to the eyeballs) and get a feeling of wellbeing from giving economic elites everything they could possibly want.

This is not the "ownership society," folks, it's a society of debt. Brought to you, mostly, by big business Republicans.

And now that we've bent over for big business lo these many years, what have we got? A melt down in our deregulated financial system. Corruption and chaos leading to melt down in the mortgage market. Soaring unemployment. Declining wages. Outsourced manufacturing. Goodbye, middle class. Way to go, "mainstream Americans."

The problem is that the American people are too stupid to care about. They're so stupid they don't know their luck has run out. I have an exit plan. Do you?

[EJDUBYA]

Two points: #1 No corporation pays taxes; its customers pay whatever tax gets levied. The customer provides all the money a corporation ever receives. The more you tax the corporation, the higher the price of its goods and services. #2 The Bush administration has mortgaged America to the Chinese and others. It's no wonder that Americans do not save; the current administration has provided the example: You do not have to increase your income (taxes) in order to pay for your lifestyle (war, etc.). All you have to do is borrow the money. Wake up America! We are in serious trouble. If the Chinese decide to cut off the lending, we are dead. Today, tomorrow, next week, next year--the day will come when the debt will come due. When the credit card runs dry, our ability to equip, train and deploy a military force in our defense will cease. Our biggest national security threat? Terrorism? Hardly. It's our 10 Trillion (and growing) debt. But then, we can't really talk about that, can we?

[amir]

Ha ha!

As predicted, Fannie Mae and Freddie Mac are swallowed by US government.

New York Times page one.

[E]

I don't think that they are bailing out homeowners...i.e. keeping values high...as much as trying to save peoples 401K's and keep the banking system from crumbling.

[Jeff S]

AR you really don't know much about economics do you?

Corporations don't have a lot of friends and they shouldn't as they are clearly to blame for a number of problems.

Unfortunately taxing them seems like a good idea in the "anyone but me should be taxed" scheme but makes no sense. If you run a business its income passes directly to you and you pay the tax.

A corporation, owned by its shareholders, pays taxes and then its distributions (dividends) or capital gains by its shareholders get taxed again. It is called double taxation and is an inefficient way to run an economy.

That is why the tax code gets convoluted and we end up having lower cap gains tax and dividends taxes.

It would be better for everyone involved if there were NO corporate tax and cap gains and dividends were taxed at the ordinary rate. That would equate investing in a corporation, starting your own business, and earning normal wages or interest.

Increasing the corporate tax rate just encourages investors to find other ways to invest their money making it more difficult for companies to raise money and ultimately decreasing the number of corporations.

BORING ECONOMICS ISN't IT? well too bad, stop talking without knowing and you wouldn't need to be lectured.