And I strongly suspect he’s been having a few phone chats with Mitt Romney, because a guy who clearly did not understand economics particularly well a few months ago seems to be picking it up pretty fast. If you’re a politician and you want my vote, getting me a little tipsy with some smooth, free-market-oriented fiscal talk is gonna help, a lot. Especially if the rest of your political resume leaves something to be desired.
McCain was addressing the “housing crisis” in a speech yesterday when he unleashed this bit of hard truth:
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.
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. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.
I have my issues with some of the rest of the speech, but this is an excellent distinction for McCain to make between himself and the two communists still in the race for the Democratic Party nomination. As a contrast, here’s The Shrew on how the Government is going to wipe your nose and make everything better:
That means acknowledging that our economic crisis is, at its core, a housing crisis, a crises caused in part by unscrupulous mortgage lenders and brokers and unregulated transactions in mortgage-backed securities, in part by speculators who were buying multiple houses to sell for a quick buck and other buyers who didn’t act responsibly. And in part by a president and administration who failed to anticipate and continue to downplay the problems we face. Unlike what happened here in Pennsylvania, when Governor Rendell started seeing problems - and I remember those articles we had in the newspaper, governor, where the housing supply was being, you know, expanded and people were putting zero money down and they were trying to once again get the American dream, they were commuting sometimes two hours to be able to afford that house. Well, those warning signals went unheeded in Washington. But thankfully, not in Harrisburg. And what we have to do now is to look at our housing crisis in greater detail. And I’d like to outline my plans to address it.
2.2 million foreclosure notices went out last year - up 75% from 2006. Communities of color have been especially hard hit. Subprime loans are five times more common in predominantly African American neighborhoods than predominantly white ones. And 41% of loans to Hispanics are subprime compared to only 22% to whites. But this crisis isn’t just about the more than 2 million households at risk of losing their homes and, of course, 2.2 million foreclosure notices means many more people than that because obviously you have homes where anywhere from two to ten people live. It’s about the tens of millions of families who have lost value in their homes.
When I talk about the home foreclosure crisis, sometimes people, I can tell, look at me a little skeptically because they, I can tell, they’re thinking to themselves, I didn’t buy one of those mortgages, I don’t have an ARM, I’m not at risk. But, in fact, that is just not the case. Home prices dropped almost 9% last quarter. Home prices for everyone. If you have paid off your home, if you have a fixed rate mortgage with a manageable interest rate, you have suffered the steepest decline on record. That means families have lost at least $1.9 trillion in housing wealth so far, nearly two-thirds of the size of the entire United States government budget. And today, nearly 9 million families are struggling with mortgages that are under water. They actually owe more for their mortgages than their homes are worth. So what was once their biggest financial asset is now a financial liability.
In other words, these people were a victim of their lack of understanding of basic economics and if you elect me President, I’ll make it stop, dammit. I’m too lazy at the moment to drag up any of the Obamessiah’s comments on the issue, but just go back and read Hillary’s speech and pretend it’s a little less shrill and you’ll pretty much have it nailed.
The problem with the “housing crisis” and all of its proposed government solutions is that it presents, once again, the age-old conflict between making economically rational decisions and making politically rational decisions. There are those who, out of extreme frustration, like to accuse politicians of not understanding basic economics. Given the education level of most of the serious candidates for high public office, this is unlikely. What seems more likely to me is that politicians will knowingly make economically incorrect decisions because they are politically advantageous.
The free market economy relies on the idea that individual actors in that market will make rational decisions and that the collective effect of those rational decisions will be an efficient economy that provides goods and services to consumers at the best possible price. This system works best when it’s left to its own devices, since the various pressures inherent in the market will tend to correct problems long before an outside observer (say a nanny state politician) even recognizes them. Not only do problems tend to be fixed faster when market forces are doing the fixing rather than politicians, the negative effect those problems have on individuals tend to be much milder.
Politicians, on the other hand, have a completely different set of criteria for rational decision-making. As elected officials, they are required by their sense of political self-preservation to make decisions that are more likely to result in their reelection, even if those decisions are economically irrational.
As a case in point, the promise to bail out financial institutions that made questionable loans to borrowers they knew were more likely to default. Under free-market conditions the institutions would have to have an increased financial incentive that outweighed the additional risk they would assume in making these loans. If their judgment about the risk/reward ratio was poor, they would face ruin if a significant enough portion of the borrowers defaulted. While this would have a negative effect in the short-term on the economy, the firms with poor judgment would be replaced by new or existing firms who were more capable of accurately assessing the risk/reward of their loans.
The borrowers who defaulted would also suffer consequences such as losing their house and damage to their credit. This is the natural economic consequence of poor judgment, and borrowers would, ideally, learn the lesson about buying more house than they can afford. If they don’t, their credit will likely be bad enough in the long-term that they won’t be able to get another loan from a credible source.
In both cases risk either shapes decision-making or it shapes survival. In this way the presence of risk both now and in the future ensures that the current problem will be less likely to be repeated.
What the Democrats are doing is promising to remove or mitigate the consequences of the increased risk that was assumed by both the borrowers and the lenders. This is an economically irrational decision since it will increase the likelihood of the risky behavior being repeated in the future either by the current players or by others. It is, however, a politically rational decision because it will appeal to a large number of traditional Democratic Party constituents who have little understanding of the economic consequences.
In order for a politician to make an economically rational decision at the expense of a politically rational one, they must, in effect, decrease their likelihood of being elected. They must display political courage, which is what McCain displayed in his speech. There can certainly be an argument about how much political risk he really assumed in saying what he said and whether or not he’ll stick to his position when it comes down to the nitty-gritty, but he made the point and assumed some risk. That’s more than most will do, and I applaud him for it.
I can’t help but think he’ll fuck it up pretty quick though. I’d vote for Bill Clinton before I’d vote for his wife or that race-baiting snake oil salesman she’s running against, so McCain pretty much has my vote locked up. The only thing in doubt is how much drinking I’ll need to do after I pull the lever.