Update: McCain, Obama and the politics of bailouts

Updated post: The government's decision not to bail out Lehman Brothers, and to let the firm die a public death, is a legitimate campaign issue today: Should the federal government be saving Wall Street firms, or should it let them fend for themselves?

Today the McCain campaign made a clear statement: It agrees with the Bush administration's decision to let Lehman die. Unless I missed it, the Obama campaign was less clear; in his statement on the Lehman failure, and in speeches today, Sen. Barack Obama did not directly address the Bush administration's decision not to throw a financial lifeline to Lehman.

Sen. John McCain's statement (read the entire thing here) includes this on the bailout: "I am glad to see that the Federal Reserve and the Treasury Department have said no to using taxpayer money to bail out Lehman Brothers, a position I have spoken about throughout this campaign."

It's clear the McCain campaign wants to talk about bailouts. This was McCain's running mate, Sarah Palin, today: "I’m glad to see in this case the Federal Reserve and the Treasury have said no to using taxpayer money to bail out another one, this time Lehman Brothers." The line drew applause.

Obama's statement (read the entire thing here), heavy on criticism of the Bush administration's past policies, does not address the question of what the administration should be doing now, and whether the administration should have used taxpayer money to save Lehman over the weekend.

Update: In an interview Monday evening with Bloomberg Television, Obama said the idea of government bailouts for financial firms "is a real problem." He added, "You can't have a situation where you expect the taxpayers to foot the bill when times are bad. And I think that Secretary Paulson understood that at some point the market is going to have to solve some of these problems."

Analysis/Bloviation: We are in the middle of a historic housing downturn and a rolling financial crisis that has already seen unprecedented levels of government intervention in the private sector. It's quite possible the government will intervene further, perhaps with a sweeping solution to recapitalize struggling banks and take bad assets off their books. Sadly, we know very little about the thoughts of the two presidential nominees on how this rolling crisis should be handled, what they will do about it when they take office and what level of government intervention they believe is appropriate.

In anticipation of your comments, I fully understand that both candidates have talked about the need for new regulations and "reforms" of both Wall Street and the mortgage market. Good enough. That's about preventing the next crisis. What about the one we're in right now?

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo: Barack Obama. Credit: AFP

Comments

[anony]

Pete,

The reason neither McCain nor Obama is saying much more than they've said about the financial problems facing this country is simply because neither understands these problems.

As you know real estate, real estate lending, credit, etc. is complicated. It may seem simple buy a house, sell a house, borrow money from a bank, but that is just a superficial showing of the real estate financing and financing in general. Politicians like McCain and Obama have a very very limited understanding of the private sector, especially the real estate industry. Regardless of education level, practice speaks volumes.
McCain and Obama just don't have experience in anything but POW for the former and I'm not sure what for Obama.

Somebody has to ask why Greenspan kept lowering interest rates? He is not a stupid man. This had to be planed? And why does the Federal Reserve have and had so much power over the years?

It is unfortunate that we don't have somebody with knowledge and practical experience running for president. McCain is a major opportunist and Obama is just a talker, although nobody really knows what he is talking about...change, hope, change hope,...most of the time I don't think Obama knows what he is talking about.

[sailor7x]

Come on people - slash your home prices....US Sec Treasury says it's only way to save economy!!!

from Paulson press conference.....

"Until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we're going to continue to have turmoil in financial markets," Paulson said.

Paulson, who was heavily involved in the decision last week for the government to take control of mortgage finance giants Fannie Mae and Freddie Mac, said if that action works as expected in helping to stabilize the mortgage markets, then housing should start to rebound.

"I'm not saying two or three months, but in months as opposed to ... years," he said.

[Peter]

Any talk about propping up housing prices or "putting a floor in" to stop prices falling further scares the you know what out of me.
Both candidates are being careful to say what will get them elected by not stating the harsh reality of the situation - that's if they even understand what is going on.
The reality is that past polices of little or no regulation got us into this mess, but over regulation or manipulation of housing prices is not the answer.
Put polices in place so that it will be difficult for something like this to happen again, but let the market adjust itself. Once home prices are in line with incomes, buyer will return and the market will stabilize.

[bkl]

Both candidates called today for more oversight. What they won't mention is that three of the four candidates have been in the Senate where they have oversight of the regulators. They all took money from Fannie and Freddie and fought against strengthening the regulators. They want to point the finger at others as not doing their jobs, but the truth is the congress didn't do its job.

[anomie - cause I loves me some French ...]

Uhhh ... yeah. Basically what my Americanized counterpart said at 5:39. Neither presidential candidate really has much of a clue what's going on. I suspect Biden grasps the underlying issues, but doesn't want to open his mouth b/c, like the guys meeting for the fourth night on Wall Street, he hasn't figured a solution.

Unfortunately, the candidatial cluelessness extends to other major issues. Like ... mmm ... geopolitics ... the physics and thermodynamics underlying our global energy crisis ... and, oh yes, agriculture and aquaculture.

[pascal]

These recent events, I think demonstrate once again the limits of the Milton Friedman economic theories.

[brian]

Thank you for some real journalism sans slant. Wish there were more like you. Keep it up.

[Ejay]

How can ONE PERSON understand all the complexities of finance, economy,educational system, healthcare, etc.
Both candidates clearly want changes, and I believe whomever is elected will select those people who are experts in the various fields, for his staff, who will advise him for possible solutions.. Of course, the "buck stops" at the President who also has to deal with congress.. Whoever wins the election will have to get Bipartisan support.

[tom]

"To be clear, it may be that Obama privately agrees with the decision to let Lehman fail, but sees no political advantage in voicing agreement with the Bush administration."

Of course. He's a politician, running for president. But he's right to emphasize the failure of the Bush administration on so many levels, as Mccain also did in his economic speech in April in Pittsburgh. They are both running, as the Daily Show put it to "Restore Honor and Dignity to the White House."

McCain shot himself in the foot by saying “I’m going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated.” That may be, as evidenced by his plan for a summer tax holiday on gas, which just about every independent economist thinks is a joke. But maybe he was just saying that to cover himself from the old Keating 5 scandal.

[g o]

Unfortunately for lehman, when they gamble and lose $, by declaring bankruptcy they do not have to be in debt forever, but others should not have to make them profitable with a bailout.

[mopar777]

Neither of these guys wants us to be able to see what will happen after the election. The debates will be halfway interesting as both of them try to distract us from the real nightmare that will start to play out next year.
The question is whether or not the really hard questions (such as about the coming pay option loan default crisis' effects) will be asked or be allowed to be asked by a media who's advertisers depend on reckless spending. Notice virtually all of the news stories today used the word "subprime" to describe the underlying cause of all this. Subprime is over.

[syscom3]

It seems most of the wealth thats been created the past couple of decades has been paper profit and not tangible hard assetts .... LIKE FACTORIES!!!!!!!

[Crystal Wilson]

I have to say that I actually do agree with the Bush administration's decision to not bail out Lehman Brothers. It just wouldn't make any sense to do so because the media confirmed that Lehman Brothers' investors would not loose their investments due to the bankruptcy. And I really don't see why we, the tax payers should have to bail the company out for the sake of its employees because it has already been confirmed that the company will be bought by another company which will most likely keep those employees. The company was obviously negligent with their investors' money and I don't think that anybody should have to pay for their negligence except for those responsible. I think that if the Bush administration should do anything, they should offer generous unemployment compensation to the employees that lost their jobs and make it mandatory that whatever company buys out Lehman Brothers, keeps the current employees of the company.

[Doug in Toronto]

Oversight, regulation and / or handouts from the Fed will mean nothing until there is a fundamental change in attitudes. Until people realize 2 primary truths, this will keep happening. First, people must accept that homes should be purchased primarily to be lived in long-term, and not used as ATM's or short-term investment vehicles. Second, no one should ever believe that the American dream of owning a home is somehow a right. It's a privilege earned thru hard work and prudent financial management: not everyone gets to live their dreams. Unfortunately, neither McCain nor Obama will advocate those truths if there's a vote to be had. They are painful lessons, but they must be learned. It's a pity that partisan politics makes that impossible.

[Tom]

Despite all the bashing of our two presidential candidates about 'what they don't understand', Richard Fuld didn't do so well as the longest-serving CEO on Wall Street. He battled for over 12 months to control the fallout from Lehman Brothers's bad bets on real estate. And he failed!!! Big time.

So who exactly is supposed to know more that McCain or Obama - and is the knowledge really more than smoke and mirrors? I too, agree with no bailout, but I'm not that knowlegable on the subject. Oh, and one report suggests Fuld will be rewarded for his inability to manage Lehman through this - "... he stands to reap more than $241 million."

[Jim]

"I think that if the Bush administration should do anything, they should offer generous unemployment compensation to the employees that lost their jobs and make it mandatory that whatever company buys out Lehman Brothers, keeps the current employees of the company."

Which employees exactly? How do you decide which ones were complicit in the catastrophic failure that is Lehman and those whom are not? Is this an argument to keep the "grunts" but get rid of the management?

Buying Lehman exactly how it is will not happen in the private sector. The only entity foolish enough to buy a guranteed money pit is the US government. If another company is going to buy Lehman, I don't believe they'll want many rules attached to their buy.

[The original RZ]

Part of the problem is that many people vote by the current status of their pocketbooks/bank accounts, and not what they think the policies should be. In response, both Obama and McCain are voicing the policy that they think will help the American public's pocketbooks - whether it is saying no to bailouts to save taxes, or bailing out to stabilize the economy.

I really wish we had a presidential candidate (or any politician, for that matter) who had the guts to make a statement like, "Financial times are hard, and they are going to continue to be hard until the housing market finishes its correction. We all need to be patient to wait this through. It will take sacrifice but we'll all be better off in a few years' time." Such a person would get my vote, but I'm guessing I'd be one of very few people to vote for him/her.

[Tony]

I'm not going to say which candidate knows more about economics. But Obama has Volker and Buffet as his economic advisors. McCain has Fiorina, who ran HP into the ground, and Meg Whitman from ebay.

Obama has definitely made the better selections.

[JS]

It is an over-reaction to think everyone on Wall St is a crook, and regulators are all stupid or asleep at the switch. Regulation of financial markets is a balance, and mistakes will always be made. What we have here is the end result of a dot com type boom in financials. You are seeing the guys left standing when the music stopped. You can't fix stupid, and you can't prevent greed.

The bottom line is valuation. Houses, stocks, companies all appear to have been worth substantially less than what people paid for them, which was based on what they were told (or thought) they were worth. The only cure for this rampant over-valuation is loss.

But there are those that would have you believe that a "stabilization" is necessary to prevent widespread panic. I prefer to call it widespread education.

[observer]

I don't think the issue is ignorance on the part of the candidates.

The problem is simple enough: home prices are too high relative to income. The invisible hand of the market wants to bring it back to a sustainable level.

But most homeowners (voters) are still in denial. They don't want prices to come down. That leads to the current dilemma for Obama and McCain. They both understand what needs to happen, but neither can afford to address the issue in a straightforward manner, or else they face accusations like "you policy hurts homeowners" "you are making it worse for Americans".

The truly ignorant are those voters, who either bought houses on inflated prices or think such prices are sustainable, not the candidates.

[whynot]

Now McCain Campaign is asking for rules for Palin's debate with Biden.
Rules for Sarah - include scripted interviews, not turning in tax returns, not showing up for troopergate.
Tom Brokaw, Bob Schieffer and Jim Lehrer - we are counting on you to do your job like Charlie Gibson did. There are no rules when someone is running for VP. There were none for Hillary or anyone else.
People lets just call this what it is - a farce. McCain is putting himself first not the country - don't let him fool you.
This is a sad day in America