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UPDATE OCTOBER 10! John Berlau declares today in his “The international mark-to-market contagion — sending global markets. . .  downward” that mark-to-market accounting rules have not yet been fixed: “Despite the credit crunch being described as the spread of the ‘American flu,’ the mark-to-market rules that are spreading it were hatched part of the Basel II international rules for financial institutions. It’s just that the U.S. jumped into the really icy water last November when our Securities and Exchange Commission and bank regulators implemented FASB’s Financial Accounting Standard 157, which makes healthy banks and financial firms take a ‘loss’ in the capital they can lend even if a loan on their books is still performing, even when the ‘market price’ [of] an illiquid asset is that of the last fire sale by a highly leveraged bank. Late last month, similar rules went into effect in the European Union, playing a similar role in accelerating financial failures.” (Underscoring Forum’s.) Read it all here.

Facing the Crisis: Deregulation, Investors, Housing

Sorting out and dealing with today’s financial mess would be hard in the best of times. But to do so in the middle of a presidential contest (with the incumbent neither running nor able to lead strongly), sifting sound recommendations from ever-changing political spin, requires our careful attention as conservatives.  Here are a few policy and political guideposts.

Deregulation

AEI’s Peter Wallison explains here –

“The Democrats are wrong in claiming that financial services deregulation is to blame for the current financial crisis — if anything, the financial sector has seen increased regulation since the savings and loan collapse in the 1980s. The lax supervision of Fannie Mae and Freddie Mac, which Republicans sought to strengthen in 2005, is the true culprit of this financial crisis.”

Wallison continues:

“It is correct to say that there has been significant deregulation in the U.S. over the last 30 years, most of it under Republican auspices. But this deregulation — in long-distance telephone rates, air fares, securities-brokerage commissions, and trucking, to name just a few sectors of the economy where it occurred — has produced substantial competition and innovation, driving down consumer costs and producing vast improvements and efficiencies in our economy.

The Internet, for example, wouldn’t have been economically possible without the deregulation of data-transfer rates. Amazon.com Inc., one of the most popular Internet vendors, wouldn’t have been viable without trucking deregulation.

– 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 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.

Barack Obama did nothing; John McCain endorsed the bill in a speech on the Senate floor.

– 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. (Underscoring Forum’s.)

“The Investor Connection.”

Larry Kudlow here declares: “Will McCain Make the Investor Connection? If he does, it could well tip the balance of this election.” –

“The investor class is a huge voting bloc. Shareholders in recent national elections represented nearly two out of every three votes cast. And most surveys put the investor-class population at slightly over 100 million. This includes direct investment through brokerage accounts, although the vast majority of investor-class members own IRAs, 401(k)s, and defined-benefit plans, such as state and city pension funds.”
. . . . . . . . . .

“Obama constantly bashes businesses and successful high-end earners, and one would think investors would be totally turned off by this. But Mayer’s polls don’t confirm it. Why? Perhaps investors sense a lack of tax-cutting passion from Sen. McCain.

For example, during the debate[in Nashville on Tuesday], McCain did mention how he and Obama differ on tax policy. At one point McCain even compared Obama to Hoover. “My friends,” he said, “the last president to raise taxes during tough economic times was Herbert Hoover, and he practiced protectionism as well.” McCain later said, “I’ve got some news, Sen. Obama — the news is bad. So let’s not raise anybody’s taxes.”

But McCain never got specific on capital-gains and dividends, and he failed to educate voters on just how important investment is to healthy job-creating businesses.

Ditto for McCain’s proposed corporate tax cut. The senator wants to slash the business tax rate from 35 to 25 percent. It’s an excellent plan. But McCain doesn’t explain how two-thirds of the benefits of a corporate tax cut go to the workforce through higher wages, with the rest then going to shareholders. He also doesn’t point out that ordinary folks actually pay the corporate tax, since firms pass this tax cost along in the form of higher prices. So McCain could, in fact, call a corporate tax cut a consumer tax cut. But he’s not doing this.” (Underscoring Forum’s.)

Americans for Tax Reform (ATR) announced today that it has made it possible here for voters to calculate the value of their 401(k) plans under the Obama, Hill Democrats, McCain and ATR plans here.

Senator McCain proposes a “Homeownership Resurgence Plan” here.

“The McCain resurgence plan would be available to mortgage holders that:

    * Live in the home (primary residence only)

    * Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).

The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of “negative equity” in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.

The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.”  

Capital Commerce’s James Pethokoukis “McCain Housing Plan a Game Changer?” wondered yesterday here:

“Imagine if John McCain had opposed the $700 billion Paulson plan last month and had instead come out swinging with the housing plan—have Treasury buy bad mortgages and issue new ones at the reduced home value—that he announced last night at the presidential debate with Barack Obama, along with a call for a suspension of mark-to-market accounting.

It would arguably have been the more ‘conservative move’ in that it would not seem to cost nearly as much—$300 billion says Team McCain—as the Paulson plan does. McCain would have come out as a hero to homeowners, taxpayers, and Main Street. (Note that several conservative economists have been encouraging direct homeowners help in recent days.) And if he had combined his housing plan with an explainable middle-class tax plan—zero cap gains rate, expanded child credit, lower marginal income tax rates—well, who knows? You know? Housing, taxes, and energy makes for a pretty voter-friendly platform.

Would such a housing plan work? Well, as economist Ed Yardeni calculates, the total value of all delinquent subprime mortgages is just $225 billion or so. Such a fuss! Buy them and move on, Yardeni says. And that would still leave plenty of money left over to inject capital into weak banks if necessary by taking significant equity stakes. (Expect this to happen anyway.)”

Today Pethokoukis added in “Nationalization Nation: Washington Goes for the Stockholm Solution” here –

“This is no surprise to loyal Capital Commerce readers: The Bush administration is considering taking ownership stakes in certain U.S. banks as one option for dealing with the credit crisis. In return for fresh capital, Uncle Sam gets a piece of the action. As superanalyst Dan Clifton of Strategas puts it: ‘We believe this step is inevitable and will occur sooner rather than later, with the U.S. following England’s move earlier this week.’”
. . . . . . . . . .
“Up next, my friends, is mortgages. Clifton’s two cents: ‘The political climate in Washington (i.e. Congress, candidates) has shifted to direct housing assistance. Congress returns November 17 for a short lame-duck session and may possibly return again in December. This could provide an opening for a housing bill, with the money already appropriated, as most of the proposals call for using the back end of $350 billion from TARP.’”

(Many of our readers will remember Dan Clifton here as a key player in the brains trust of Americans for Tax Reform.)

But other strong free-market voices like CEI’s Hans Bader here believe the McCain Plan is a terrible idea:

“At last night’s debate, Senator McCain floated a horrible idea: to have the government buy up bad mortgages and then write off part of the mortgage and reduce the interest rate so that delinquent borrowers can afford to keep living in their pricey homes.  Equally disturbingly, Senator Obama seems to agree with this stupid idea, pointing with approval to the fact that the bailout bills he supported already permit this to a limited extent.   His only objection seems to be that McCain is hogging credit for this awful proposal for himself.

Michelle Malkin explains why this is a terrible idea.

Having the taxpayers buy up bad loans, and write part of them off, forces homeowners who bought small houses and lived within their means to effectively pay the mortgages of those who bought large houses and can’t afford them.”

Great Depression historian Amity Shlaes here cautions against action that extends the downturn like the government action following the 1929 crash:

“Our equivalent scenario would be: raising taxes, ignoring Latin America, conducting “Pelosi Hearings” in the place of the Pecora Commission hearings of yore. In The Forgotten Man there’s a chapter called “A Year of Prosecution,” about 1934. When the New Deal didn’t bring complete recovery, the New Dealers tried to prosecute their way to economic success. That impulse is extremely destructive. The story this past weekend about President Uribe of Colombia visiting America seemed separate from the Treasury bailout story. But the two are related. Cutting back protectionism increases chances of saving Latin America politically. But it is also good for our economy.” (Underscoring Forum’s.)

Can we leave our middle class without financially informed reassurance and some prudent protection that will allow responsible homeowners to keep their personal residences and work to recoup their finances and retirement plans? Without an agreed-on and marketable conservative package, the Left will win by default in the coming lame-duck sessions and in the next Congress — no matter who is president-elect or president. 

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