Is Aggressive Intervention Required?
WHAT THE EXPERTS SAY
Stimulating the economy: In the eyes of economists, not all stimuli are created equal. According to Mark Zandi of Economy.com, the best ways to jumpstart the economy are those that target the lowest-income Americans quickly and directly. That means spending increases. Zandi calculates that the most effective measures boost food stamps ($1.73 in added GDP per dollar spent), extend unemployment insurance ($1.64), and build or repair infrastructure ($1.59). By Zandi's math, Obama's $25 billion infusion for state and local government services also packs a punch; it would deliver $34 billion in growth. By this measure Obama's stimulus fares well -- much better, in fact, than the stimulus package passed by Congress last winter. Those business incentives and personal tax rebates will generate just 27 to 29 cents in activity for every dollar they cost the Treasury.
On the other hand, the non-partisan Congressional Budget Office says that an effective market jolt must "focus on the time period when stimulus is most likely to be needed." In that light, Obama's $25 billion in infrastructure spending looks less appealing. "Large-scale construction projects of any type require years of planning and preparation," says the CBO. "Even those that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy."
Regulating financial markets: While financial interests generally oppose more intrusive federal regulation, there is widespread acknowledgement in the wake of the mortgage meltdown and the current economic distress that something is likely to change -- and probably should change. In particular, Obama's sweeping call for revamping federal oversight makes sense to many experts. As the Illinois Democrat noted in his speech, "the large, complex institutions that dominate the financial landscape do not fit into categories created decades ago. Different institutions compete in multiple markets -- our regulatory system should not pretend otherwise." Meanwhile, mortgage companies issued two-thirds of the subprime loans but did not fall under the tough guidelines for lending that applied to banks and thrifts.
The principles Obama has laid out follow the thinking of Congressional Democrats, but the notion of wholesale streamlining taps into a bipartisan agenda. A 2007 study by McKinsey & Company for Democratic Senator Charles Schumer and (then-Republican) New York City Mayor Michael Bloomberg found that financial executives are gravitating toward the United Kingdom, which has a single financial services regulator: "Many of the executives interviewed find a single regulator easier to deal with - there is a single point of contact and a single institution to whom regulated parties are held accountable. Increasingly, they prefer to operate under a single, expansive universal banking license, as opposed to working through multiple chartering regimes and a variety of licenses and legal entities." Two days after Obama's speech, the Bush Administration released its own plan for reform, which embraced a similar ethic. The Treasury plan, however, is much more cautious. It does not call for tighter regulation -- in fact in places it calls for less -- and while it proposes to give the Federal Reserve more information about non-bank institutions, it wouldn't grant it authority over those institutions except in a crisis.
THE MCCAIN AGENDA, IN DETAIL
Stabilizing the housing crisis: John McCain was initially short on sympathy for subprime borrowers -- as late as March he insisted that, "It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers" and that "any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't." But a month later he softened the hard line, unveiling a "HOME Plan," in which "every deserving American family or homeowner will be afforded the opportunity to trade a burdensome mortgage for a manageable loan that reflects their home's market value." Actually, the initiative would be limited to those who'd taken on a subprime mortgage for their primary residence after 2005. Moreover, borrowers, though underwater now, would have to have been credit worthy at the time they took on the loan. The HOME Plan would require the lender to write down a portion of the subprime mortgage; the government would then pay it down and guarantee a new mortgage issued by a bank. Though similar in many respects to the proposal developed by Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) that eventually became the Housing and Economic Recovery Act, McCain's plan would have been less expansive, reaching only 200,000 to 400,000 homeowners.
The passage of the Dodd-Frank bill likely makes McCain's plan moot, but the Arizona senator continues to call for reform of the mortgage system to ensure transparency and accountability. "Homeowners should be able to understand easily the terms and obligations of a mortgage," he has said. "In return, they have an obligation to provide truthful financial information and should be subject to penalty if they do not." McCain supports requiring a "responsible down payment" from the buyer before government-backed companies offer a guaranty. McCain would also convene a summit of the nation's mortgage lenders, which "should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers," according to McCain. "They should pledge to do everything possible to keep families in their homes and businesses growing."
Stimulating the economy: McCain has not proposed any further emergency economic stimulus. Last January, as the Bush Administration and Congress talked of short-term tax rebates (which eventually became law), McCain appeared resistant, and focused instead on his long-term tax-cutting proposals.
Stabilizing and regulating financial markets: In March, McCain set out his conditions for government intervention in the banking system: It "should be based solely on preventing systemic risk that would endanger the entire financial system and the economy." At the time, McCain offered his unenthusiastic support for the Bear Stearns bailout. He also backs the present federal takeover of the government-sponsored mortgage enterprises, the risk of encouraging moral hazard notwithstanding. Like Obama, he would require that shareholders take the first loss and taxpayers collect the first profits. He would also restructure and downsize the two enterprises.
In mid-September, McCain called for a sweeping overhaul of financial regulation, similar in its outline to what Barack Obama proposed. "The McCain-Palin Administration will replace the outdated and ineffective patchwork quilt of regulatory oversight in Washington and bring transparency and accountability to Wall Street," the campaign declared in a statement. "We will rebuild confidence in our markets and restore our leadership in the financial world."
This is a reversal of his original position, and was announced as Merrill Lynch looked likely to become a division of Bank of America, Lehman Brothers declared bankruptcy, and AIG teetered on the brink. Back in March, the Arizona Republican was not inclined toward tightening regulations such as liquidity requirements, or overhauling federal supervision of the financial markets. In general, he told the Wall Street Journal, "I am a fundamentally a deregulator." In the financial markets, McCain said then, "there is no substitute for adequate capital to serve as a buffer against losses," and McCain instead promised to encourage "increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."
As of this writing, McCain has not elaborated on the sort of reform he would seek. An unidentified campaign official told National Public Radio that it would entail updating the rules, not relaxing them. "The goal would be to have a comprehensive regulatory reform, so that every transaction, whether it's done in a commodities future market, a financial futures market, a stock market, a bond market -- if it has the same economic transaction, it should have the same regulation," Douglas Holtz-Eakin, McCain's top economic adviser, said in a separate interview with NPR. Currently, "there are transactions being treated differently, and obviously people will seek out the holes." When pressed whether this would mean more or less regulation, Holtz-Eakin demurred. "We would expect that you'd have an efficient regulatory system. I think more and less is probably not the right way to think about it."
However, in other venues, McCain has articulated certain reforms:
- He would "convene a meeting of the nation's accounting professionals to discuss the current mark-to-market accounting systems." ("There is widespread concern that this approach [to valuing long-term assets] is exacerbating the credit crunch.")
- He would, as he announced in a June speech, set rules to "assure fairness and punish wrongdoing in the market." In addition to a renewed emphasis on prosecuting "reckless corporate conduct," McCain would insist that "all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders."
- He would clamp down on speculation in oil futures markets to "assure transparency, prevent abuse, and protect the public interest." Oil futures, he told the oil industry in June, must be "just as clear and effective as the rules applied to stocks, bonds, and other financial instruments."
The McCain Record: McCain voted for the Economic Stimulus Act, but was not present for the vote on the housing plan.