Arnold Stumps for the Big Mac

If you didn’t catch Arnold Schwarzenegger’s recent appearance at the Ohio McCain rally, here he is. Some good lines in this speech.

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Easy Rider

The unprecedented 600+ million dollars that Obama has raised, in turn, should (but doesn’t, at least in MSM) raise questions about popularly held assumptions.

Democrats’ constant cry that they are the party of the poor & oppressed doesn’t exactly correspond to the obscene amount of funding raised for Barack Obama. Look at the million plus funds (mostly from out-of-state donors) raised in a matter of hours for MN’s Michele Bachmann’s democratic opponent.

Just where is all this money coming from? You might ask Barack Obama or David Axelrod, but even they couldn’t tell you. Apparently, the Obama campaign subscribes to a “don’t ask, don’t tell” policy when it comes to receiving money. They can’t tell you if the money is from non-citizens, from foreign or domestic terrorists, or from sources that have exceeded the legal donor limit.  At best, this is willful ignorance that reinforces Obama’s glib disposition to deal “without precondition.” It’s time we think about the consequences of such an approach. See the New York Post article on the source of Obama’s Campaign Money: DUBIOUS DONATIONS

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Obama WGN Radio Interview

Excerpts from Obama’s radio interview while he was part time state senator, part time lecturer. What is interesting here is that Obama takes wealth redistribution as a matter of course, and that the real question is how best to bring redistribution about - through judicial or administrative channels. Obama doesn’t question that wealth redistribution is not a fundamental principle of the founding fathers. Instead, Obama apparently sees wealth redistribution as the next step in a continuing civil rights movement. The Obama tax plan for Americans clearly represents this wealth redistribution philosophy.

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McCain Interview on Letterman

Here’s the full McCain interview on Letterman last night:

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Economic Agenda, Mortgage & Housing

Going though all the documentation on Obama’s campaign website is not unlike watching Obama give a speech or during a debate; word-smithing & pretty presentation abound in Obama’s platform documents. Obama tells us what he thinks people want to hear - like all politicians - but you don’t have to read between the lines to recognize that Obama’s opinion of the average American is pretty low.

Here’s a look at the Economic Agenda - Mortgage & Home-Ownership, published by Obama:

(1) Create a government entity to track & regulate the mortgage industry -

  • Problem: Democrats notoriously blocked Fannie & Freddie examination & oversight, leading to this very problem. That Obama can create an entity that appropriately regulates the mortgage industry is pretty doubtful, especially with Pelosi & Reid at the helm.
  • Corollary: Another big spending idea (over $100 million) of Obama’s.
  • Cost: Set-up another government agency & maintain national database, according to Obama, about 200 million.

(2) Mandate that every loan should come with a clear-cut schedule of borrower payments to lenders (“HOME”=Homeowner obligation made explicit). Only those buyers who wish to remain blissfully ignorant of what they will owe every month can ignore the numerous mortgage calculators readily available on mortgage websites, or simply don’t ask their lender (if the lender hasn’t spelled it out for them already).

  • Problem: This doesn’t weed out speculators. And besides, this idea of HOME already exists. A lot of people who signed ARMs with interest rates that would increase after a couple years did so thinking that they would re-finance their ARM mortgage to a conventional mortgage. Problem was, after a couple years, market values decreased & re-financing was impossible. These homeowners knew that they would have to pay more when the rate increase kicked-in, they just incorrectly bet on the real estate market continuing its upward trend.
  • Cost: Enforcing this as part of the Stop Fraud Act (100s of millions).

(3) Create a Foreclosure Emergency Fund - A government fund to pay mortgages for “innocent” homeowners. Really, Obama lays it on thickly here. “Barack Obama will establish policies to help Americans currently facing foreclosure through no fault of their own”?? Clearly, Obama doesn’t believe in personal responsibility, and (to him) Americans are as innocent - and ignorant - as when they were born. Constantly referring to Americans as “innocent homeowners” and “victims” isn’t only fallacious, it’s insulting.

  • Problem: Obama even suggests that your neighbor’s foreclosed home will increase the likelihood that you will be driven to foreclosure too. A foreclosed home may drive down market values, but as long as you’re paying your mortgage, you won’t go through foreclosure! We can only suppose that Obama believes birds of a feather flock together - that you are just as ignorant & vulnerable as your neighbor. Obama is playing victim by association with us (but didn’t he discount this association argument where Wright/Ayers are concerned?).
  • Cost: Unknown - likely billions of dollars, judging from other relief funds.

(4) Give Bankrupt Homeowners Protection from Mortgage Payments - Revise law toward decreasing/eliminating mortgage payments of bankrupt homeowners.

  • Problem: Bankruptcy protects you from creditors & outstanding debts - it wasn’t designed to provide a free ride/free home for you. Who is going to cover the cost of the unpaid mortgage? You can already walk away from your mortgage without being held accountable for the amount outstanding (other than a credit report ding). Obama calls the current law a “bankruptcy loophole” - but this idea encourages bankruptcy filings to stay in the house payment-free. This only exacerbates the current housing crisis.
  • Cost: Unknown - hundreds of millions? Makes the housing crisis worse.

(5) Refundable Universal Mortgage Credit - Obama plays more class warfare: “like so much in our tax code, this [itemized mortgage interest tax deduction]tilts the scales toward the well-off.” Are Americans on two opposite sides? Obama would have us think so.

  • Hitch: A mortgage interest tax deduction is pretty basic, something rote to a filer from H&R Block, but perhaps Obama thinks a $50 filing fee is only for the wealthy.
  • Cost: Ultimately, this is another $500 refund check going to 10 million people - that’s 5 billion dollars…but it’s just a drop in the well compared to his tax plan. See the next installment on Obama’s Plan for the middle class.

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Obama at the Alfred E. Smith Roast

Obama came on just after McCain (make sure you see McCain’s intro of Obama in my previous post). Funny too, but McCain is clearly the one you want roasting you at your charity dinner (unless you’re Barack Obama - his smile appeared rather forced at times during McCain’s shtick, and no wonder).

Part 1:

Part 2:

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McCain Roasts Obama, Press at Alfred E. Smith Charity Dinner

Move over Tina Fey! McCain at the Alfred E. Smith Charity Dinner roasts Obama, the Clintons, & the media. A nice dose of hilarity, especially in the last weeks of the campaign.

McCain’s complete speech is separated, unfortunately. Watch both - they’re worth it.

From the top:

and through to the end:

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Obama Ignores Key Factors by Blaming Republican Deregulation

We’ve all heard Obama repeatedly point the finger at McCain & Republicans for deregulating Wall Street - leading to this financial mess. Obama has basically become like a bad song on the radio - you hear something enough, it actually starts to sound decent, or in Obama’s case, seem like truth.

But deregulation isn’t really at the heart of the issue, according to American Enterprise Institute Fellow in recent Bloomberg piece (bolding added),

In the debate on Sept. 26, Democratic presidential nominee Barack Obama argued that the current crisis in the financial markets is the result of Republican deregulation.

The credibility of the charge depends on ignoring several important facts:

– There has been a great deal of deregulation in our economy over the last 30 years, but none of it has been in the financial sector or has had anything to do with the current crisis. Almost all financial legislation, such as the Federal Deposit Insurance Corp. Improvement Act of 1991, adopted after the savings and loan collapse in the late 1980s, significantly tightened the regulation of banks.

– The repeal of portions of the Glass-Steagall Act in 1999 — often cited by people who know nothing about that law — has no relevance whatsoever to the financial crisis, with one major exception: it permitted banks to be affiliated with firms that underwrite securities, and thus allowed Bank of America Corp. to acquire Merrill Lynch & Co. and JPMorgan Chase & Co. to buy Bear Stearns Cos. Both transactions saved the government the costs of a rescue and spared the market substantial additional turmoil.

None of the investment banks that got into financial trouble, specifically Bear Stearns, Merrill Lynch, Lehman Brothers Holdings Inc., Morgan Stanley and Goldman Sachs Group Inc., were affiliated with commercial banks, and none were affected in any way by the repeal of Glass-Steagall.

– Republicans have favored financial regulation where it was necessary, as in the case of Fannie Mae and Freddie Mac, while the Democrats have opposed it. In 2005, the Senate Banking Committee, then under Republican control, adopted a tough regulatory bill (for which McCain was a voluble co-sponsor) for Fannie and Freddie over the unanimous opposition of committee Democrats. The opposition of the Democrats when the bill reached the full Senate made its enactment impossible. [...]

– The subprime and other junk mortgages that Fannie and Freddie bought – and the market in these mortgages that their buying spawned — are the underlying cause of the financial crisis. These are the mortgages that the Treasury Department is asking for congressional authority to buy. If the Democrats had allowed the Fannie and Freddie reform legislation to become law in 2005, the entire financial crisis might have been avoided.

Obama & Democrats are pulling a bait & switch with regard to subprime lending as well. Apparently, Democrats had nothing to do with pushing home ownership for those who couldn’t afford homes. At-will dementia is a powerful and pathetic thing.

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Giving the Treasury Plan a Fair Shake

Greg Mankiw (if you’ve ever taken macro, you know this prof) received a note critiquing the critics of Paulson’s Plan. It’s important to hear from the folks in the field, no matter how much you may distrust what they have to say. Note follows with my bolding.

Academic economists don’t like the Treasury plan, but nearly all of the Wall Street economists are for it. You don’t have to be all that cynical to say that the Wall Street economists are talking their book. But I’d like to think that there is at least in part a sense in which they are more attuned to the reality of the situation in credit markets — that last week we were a day or two away from a breakdown of the financial system.

Here are three common critiques from the academics and journalists and what they are missing:

1. “Treasury must overpay for this to work because otherwise you are not injecting new capital, only adding liquidity.”

Treasury is talking with the experts you would expect — prominent academics who have designed auctions. It’s complex because there are so many different MBS (Mortgage-backed Securities), but Treasury is committed to get the market price as best as it can. It will not intentionally overpay. But the assertion that the plan will not boost capital is wrong. If Treasury gets the asset prices exactly right next week when the reverse auction starts, those prices will be higher than the prices that would have obtained before the program was announced. That difference means that by paying the correct price next week we will be injecting capital relative to the situation ex-ante. Treasury does not need to overpay. And the taxpayer can still see gains — say if the announcement and enactment removes some uncertainty about the economy and asset performance, but not all. Then prices could rise further over time. But the main point is that it is not necessary to overpay to add capital. I think Krugman is a leading purveyor of the “they must be intending to overpay” assertion.

2. “Taxpayers will be better off if Treasury gets warrants.”

This is essentially the assertion made in David Leonhart’s column in the NY Times on Wednesday. And it again illustrates that we would all be better off if high schools taught the Modigliani-Miller theorem. MM implies that the price of the asset (again,assuming the auction gets it right) will adjust to offset the value of any warrants Treasury receives. In this case of a reverse auction, imagine that the price is set at $10. If Treasury instead demands a warrant for future gains of some sort, then the price will rise in the expected amount of the warrant — say that’s $2. Then the price Treasury pays for the asset will be $12. Some people might prefer to get $12 in cash and give up a warrant worth $2 in expected value. Fine, that’s a choice to be made. But the assertion that somehow warrants are needed is simply wrong.

3.”The plan should be to inject capital instead.”

This is the Luigi Zingales criticism. Again, that’s a fine plan and might be a good idea. But that’s a complement to an asset purchase plan, not a substitute — and it’s one allowed by the Treasury proposal and indeed envisaged in some cases. But that will take much longer to implement than an asset purchase. That’s why it’s a complement not a substitute — Treasury needs to act now. The particular ideas from Zingales et al that there should be a forcible capital injection are pure ivory tower, unfettered by the practicalities of legality, enactment, or implementation.

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Economic Crisis, Act II

McCain & Obama’s differing attitudes toward tackling the economic crisis has kept the country, already reeling from the financial saga, focused on the presidential race. Act II of this saga: McCain’s risky, indeed maverick, move to delay the first debate is considered by liberal MSM & polled voters as a mistake, while conservative proponents view his decision to focus on the economy as presidential and verification that McCain does indeed put “Country First.” Obama remains focused on his campaign (easily able to handle both debate & legislation to save the economy), quick to voice caution, and reluctant to return to Washington (though he did come back for a meeting today at the behest of the current President).

Right now, the Presidential Debate Commission says the Friday debate is still on, and whether it’ll turn into an Obama stump speech is definitely possibility. Is this crisis really important enough for either Obama or McCain to postpone their campaigns, or does the crisis merit more discussion (i.e. debate) from the candidates for voters to better determine how they would act as President?

Brookings published simple explanation of the crisis in “A Brief Guide to Fixing Finance”

  1. The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the risks of residential real estate;
  2. The peaking of residential home prices in 2006, combined with lax lending standards were followed by a very high rate of delinquencies on subprime mortgages in 2007 and a rising rate of delinquencies on prime mortgages;
  3. Losses thereafter on the complex “Collateralized Debt Obligations” (CDOs) that were backed by these mortgages;
  4. Increased liabilities by the many financial institutions (banks, investment banks, insurance companies, and hedge funds) that issued “credit default swaps” contracts (CDS) that insured the CDOs;
  5. Losses suffered by financial institutions that held CDOs and/or that issued CDS’s;
  6. Cutbacks in credit extended by highly leveraged lenders that suffered these losses.

McCain characterized the consequences of these actions in his address yesterday (my bolding),

We must pass legislation to address this crisis. If we do not, credit will dry up, with devastating consequences for our economy. People will no longer be able to buy homes and their life savings will be at stake. Businesses will not have enough money to pay their employees. If we do not act, ever corner of our country will be impacted.

Many have called for the debate to go on and believe that is political suicide for McCain to suspend his campaign. Perhaps so. McCain has made clear, political stratagem or no, that he is going to live up to his pay grade and develop an appropriate solution and build congressional consensus behind economic legislation.

Obama’s statement on the economy urged congress to focus on the “broad principles” that he & McCain put forth (my bolding).

There are times for politics, and then there are times to rise above and — politics, and do what’s right for the country.

So, in my mind, actually, it’s more important than ever that we …try to describe where we want to take the country and where we want to take the economy, as well as dealing with some of the issues of foreign policy that were initially the subject of the debate.

Indeed, in this statement, Obama highlights just how much he speaks,

I have been in constant contact with leadership in Congress. I have talked to Secretary Paulson just about every day. I spoke to him twice today…

I have spoken to congressional leaders every day this week. I have spoken to Secretary Paulson every day this week.

But, keep in mind, again, I’m talking to Nancy Pelosi, Harry Reid, the congressional leadership, Hank Paulson, I’m talking to them every single day.

We have an economic crisis with the potential to financially cripple millions of lives - the absence of liquidity in the markets has serious ripple effects that must be addressed. Congress must submit a timely, appropriate solution signaling confidence in the market system to prevent companies from artificial or premature collapse (from investor panic and liquidity calls).

The difference between the two candidates is starkingly clear. McCain is a man of action & risk (indeed as a military officer, he had to quickly assess the situation and act - or else face death). Obama feels the need to “describe” the issue to convince voters of how he would act - a step shy of acting himself. Voters need to decide if the saying, “actions speak louder than words,” really has merit after all.

To be continued in Act III.

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