Friday, March 28, 2008

Expediency, Morality and the McCain Economy

Last week, I picked on the Democratic candidates, for their failure to accurately diagnose the causes of our present economic crisis, or to offer effective proposals for dealing with it. Since then, both Obama and Clinton have sharpened their critiques. There's a lot to praise in their speeches, and a fair amount to criticize. But sometimes it's worth pausing to remember that, for all our internal debates, the gaping chasm between Republicans and Democrats on these issues makes our own divisions all but vanish in comparison. So let's take a good look at the economic address McCain delivered on Tuesday to prove his sound grasp of the issues.

He begins with a classic McCain line, a reminder of why so many Americans find the man's approach to politics refreshingly honest:
Let's start with some straight talk: I will not play election year politics with
the housing crisis. I will evaluate everything in terms of whether it might be
harmful or helpful to our effort to deal with the crisis we face now.
Fantastic stuff. A no-nonsense approach to the crisis. The trouble is that he repudiates it in the very next line:

I have always been committed to the principle 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.
Here's the rub. McCain starts by promising to apply a basic standard of expediency. He'll weigh his policies solely in terms of their effectiveness in responding to our present crisis. Then he reframes the issue in moral terms. Those who have acted irresponsibly will get their just deserts - the government won't intervene to help them. There's just one problem with that - what happens an effective response to the crisis serves to aid those who acted irresponsibly?

Enter the McCain double standard:

Government assistance to the banking system should be based solely on preventing
systemic risk that would endanger the entire financial system and the economy.
Let's translate that. When banks and other financial institutions behave irresponsibly, McCain's saying, he'll bail them out if allowing them to fail seems likely to cause collateral damage. In other words, when his two principles come into conflict, he'll choose expediency over morality - not because the banks deserve to be rewarded for their sins, but because failing to act could endanger the interests of innocent parties.

And when it comes to the millions of ordinary Americans facing foreclosure?

In our effort to help deserving homeowners, no assistance should be given to
speculators. Any assistance for borrowers should be focused solely on
homeowners, not people who bought houses for speculative purposes, to rent or as
second homes. Any assistance must be temporary and must not reward people who
were irresponsible at the expense of those who weren't.
Suddenly, morality trumps expediency. McCain is focused on punishing the guilty. When it comes to the financial sector, he suggests our guiding principle ought to be the intent of our actions - so long as we act in the furtherance of the general good, we can overlook incidental benefits to the guilty parties. But when it comes to homeowners, his overriding concern is the effect of our actions - if policies would, in part, deliver relief to people who behaved irresponsibly, they must be rejected, even if they offer the most effective response.

Undergirding this double standard is a very particular understanding of the origins of the present crisis, which McCain traces to two specific problems. The first of these was the creation of a speculative bubble in housing. "Some Americans bought homes they couldn't afford," explains McCain, "betting that rising prices would make it easier to refinance later at more affordable rates....and those homeowners are now facing the reality that the bubble has burst and prices go down as well as up." But it's not all 55 million mortgage borrowers in America whom McCain blames for our present troubles, but rather the 4 million whose lenders have foreclosed or who are more than 30 days late with their payments and so considered delinquent. The other "51 million," he says, "are doing what is necessary -- working a second job, skipping a vacation, and managing their budgets -- to make their payments on time." Note the implication. If the other 4 million had just worked a little bit harder and tightened their belts a little more, we wouldn't be facing this mess.

That borders on delusion. I'm sure there are some examples of profligacy leading to foreclosure. But for the most part, the folks facing foreclosure are doing everything they can to stave it off. They may take third jobs, in addition to the second jobs they were already working just to make ends meet. Forget vacations - they're spending less on food, or their children's clothing. And in most cases, it's still not enough. When the first balloon payment hits after two years, when the adjustable rate starts to float, when they get hit with an unexpected medical bill, when a spouse gets laid off in the faltering economy - they still fall behind on the payments. Their attempts at home ownership were doomed the moment they signed their loan papers, and their hope of escape was sealed by the declining market. And yes, they certainly deserve to be blamed for their original mistakes in borrowing as they did. But the 4 million already falling behind - and the millions more who certainly will in the coming year, absent intervention - aren't in trouble because they're taking too many vacations, or because their family budgets are bloated and wasteful. They're in trouble because they can't afford to repay the loans they signed, and in many cases, because they can no longer sell their homes for enough to repay their loans, either.

McCain demands, later in the speech, that henceforth, borrowers "should be able to understand easily the terms and obligations of a mortgage" and that "every lender [must be] required to meet the highest standards of ethical behavior." But it's not clear why such reforms are necessary - after all, he never claims that borrowers weren't able to understand the terms of the deals they were signing, nor that lenders failed to meet the standards of ethical behavior. All the lenders were guilty of, says McCain, was growing "complacent," enjoying "a false sense of security," and lowering "their lending standards." The lenders erred, in short, by failing to be on guard against those unscrupulous borrowers.

But that's just one cause of the crisis. There's also the turmoil in the financial markets, the result of "an explosion of complex financial instruments that weren't particularly well understood by even the most sophisticated banks, lenders and hedge funds." These instruments "weren't always managed wisely because people couldn't properly quantify the risk or the value of these bets." As a result of complexity and a basic lack of transparency, "the initial losses spawned a crisis of confidence in the markets."

Let's line those two explanations up, side-by-side. In the housing market, millions of ordinary Americans displayed remarkably little financial sophistication by taking out irresponsible loans, offered to them by a variety of lenders and then packaged and resold by our most sophisticated financial institutions. The borrowers alone are to blame for this mistake. But in the financial market, the problem was that everything grew too complicated, and none of the analysts, brokers, or executives really had any idea what it all meant or how to manage it. So these experts, these financial wizards, piled on risk without understanding what they were doing. It's not clear to McCain that anyone should be blamed for this.

You read that correctly. John McCain believes that Joe Average needs to be punished for his irresponsible speculation, buying a home by signing a mortgage he didn't fully understand, thereby shouldering risk he failed to manage properly. But John Banker, who irresponsibly speculated by creating and trading in complicated securities he didn't fully understand, thereby shouldering risk he failed to manage properly? Well, if it helps the economy, he should be bailed out. Not only that, but since his irresponsible speculation and ineptitude have drained his bank's reserves, we need to replenish them by "removing regulatory, accounting and tax impediments to raising capital." And then, because the credit crisis has severely shaken our economy, we need to respond by "reducing our corporate tax rate" and "eliminating the Alternative Minimum Tax," so that neither John Banker nor his employer will be unduly restrained from seeking to maximize their profits by fear that the government will make them share.

I'm not arguing that we should blindly bail out borrowers, or that intevening to shore up financial markets is a mistake. Clearly, we need to weigh any response carefully. But I do think we need a single, consistent standard. We need to acknowledge that there's more than enough blame here to go around - that borrowers, brokers, lenders, banks, investors and regulators all behaved with breathtaking irresponsibility. And then we need to take appropriate action, ensuring that the damage doesn't cascade through the economy. It's immensely gratifying to moralize, but weathering this crisis will require making difficult choices and compromises. There's no room for inflexible, rigid approaches.

Not to worry. McCain offers us these comforting words:

In this crisis, as in all I may face in the future, I will not allow dogma to
override common sense.

Of course not. Dogma is what the other guy believes. Sticking inflexibly to your own irrational views? That's just plain common sense.

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