This was the week for the presidential candidates to address the twin economic crises of the moment: the collapse of the sub-prime housing market on Main Street, and the resulting credit crunch that has afflicted Wall Street. Senator Hillary Clinton went first on Monday; John McCain followed on Tuesday. Yesterday was Barack Obama's turn. Interestingly, this was one area where you could find daylight between the candidates -- and more than you might expect, at least in the case of the Democrats.
Speaking in Philadelphia, once America's financial capital, Hillary Clinton said, "Over the past week, we've seen unprecedented action to maintain confidence in our credit markets and head off a crisis for Wall Street Banks. It's now time for equally aggressive action to help families avoid foreclosure and keep communities across this country from spiraling into recession. The solution I've proposed" -- there's that word again -- "is a sensible way for everyone - lenders, investors, mortgage companies and borrowers - to share responsibility, keep families in their homes, and stabilize our communities and our economy." In other words, the senator from New York supports bailing out Wall Street -- which, according to a tally by the New York Times could receive up to $400 billion in deeply discounted Federal Reserve loans -- but she insisted on equal treatment for Main Street, a position that should not surprise us, considering that NPR, citing the Center for Responsive Politics, reported yesterday that she has taken $6.6 million from the securities industry.
Naturally, there is a four-point plan:
*Clinton supports the proposed legislation from Rep. Barney Frank (D-MA) and Sen. Chris Dodd (D-CT), the chairs of the banking committees, to "expand the government's capacity to guarantee affordable, restructured mortgages, and use a private-sector auction of large mortgage pools to help unfreeze our struggling mortgage market." The Frank/Dodd legislation would allow the Federal Housing Administration to guarantee up to an additional $300 billion in at-risk mortgages. If that fails, she'd have the FHA step in to purchase, restructure, and resell troubled mortgages. "Such an effort would not require creating new government bureaucracy and could be self-financing over the long run."
*She wants President Bush to immediately convoke an Emergency Working Group "headed by a non-partisan group of eminent leaders like Alan Greenspan, Paul Volcker, and Bob Rubin" to consider what kind of government action, including the FHA programs, will best end the spate of foreclosures.
*She wants mortgage servicing firms that restructure sinking mortgages protected from adverse tax consequences as well as lawsuits by bondholders who stand to lose investment income.
*She proposes to direct $30 billion to states and localities to fight foreclosures concentrated in certain neighborhoods. This "Emergency Housing Fund" would help communities work with at-risk homeowners to ward off foreclosure, fund increased police and fire protection to neighborhoods already blighted with foreclosed properties (since increased foreclosures lead to increases in crime), and help communities buy and rehab distressed properties and return them to productive use.
Yesterday in New York, Barack Obama outlined a series of steps similar to Clintion's: he supported the Frank/Dodd initiative, and clarifying the obligations of mortgage services. He even called for a housing stimulus program amounting to -- wait for it -- $30 billion. (This of course led to charges of unoriginality from the Clinton campaign: "Obama Copies Hillary's 'Second Stimulus,' " decries one press release at the Clinton campaign website.) He proposed clear and accurate loan disclosure, and promised to repeal the "loophole" that prohibits bankruptcy judges from revisiting the terms of mortgages for primary residences. On the other hand, while he encouraged banks to write down principal on at-risk conventional mortgages, he did not suggest intervening in the market to buy and restructure mortgages.
But then Obama went much further. It a speech that sounded like a history lecture -- he began by recounting the argument between Alexander Hamilton and Thomas Jefferson over the role a strong central bank -- he extended his critique to the financial markets, a position that may surprise us, since he took even more Wall Street money than Clinton: $6.7 million, according to the Center for Responsive Politics. "The concentrations of economic power -- and the failures of our political system to protect the American economy from its worst excesses -- have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression." They continue to this day, he said, abetted by campaign contributions that win sympathy in Washington. Still, "the American experiment has worked in large part because we have guided the market's invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest." (You can watch the speech here or read it here.)
Because "the American economy does not stand still, and neither should the rules that govern it," he outlined a broad reform of financial regulation (summarized here as a PDF available for download). Among other things, he proposed streamlining oversight by ending the "balkanized framework of competing regulatory agencies" and instead regulating firms by what they do rather than what they are. As the Illinois senator noted, 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. But he also insisted that any kind of financial institution that can borrow from the Federal Reserve should be subject to the Fed's basic authority. And he insisted on tougher disclosure requirements for Wall Street firms.
McCain, who only three months ago remarked to a reporter that "the issue of economics is not something I've understood as well as I should," offered pretty much the opposite approach on Tuesday. The oft-reported sound-bite goes like this: "It is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers." (Obama, in his speech, derided McCain's plan as " little more than watching this crisis unfold.") McCain ruled out assisting speculators -- fair enough -- and added, "any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't." As for Wall Street, "government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy," he said. " In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses." The solution, though, is not tougher oversight to make sure they maintain reserves. Instead, "our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."
If McCain's attitude is as predictable as the Democrats, there is one thing that is surprising about it: he is now further to the right on the matter of regulating Wall Street than the Bush Administration. As NPR's Adam Davidson noted yesterday, even Treasury Secretary Henry Paulson has advocated what McCain will not.