Tuesday, September 16, 2008

BARACK OBAMA, JOHN MCCAIN

Obama on Wall Street: McCain's Out of Touch; My Solutions to Come Later

It seems the centerpiece of the Obama argument on the economy is to shriek in horror that McCain began a sentence by saying the "fundamentals of our economy are strong."

On Obama's campaign blog, there's a lengthy transcript and video clip of Obama hitting McCain for saying this, and then an almost perfunctory, "Barack understands what's going on and has a plan to jumpstart the economy, provide middle class Americans tax relief, support small business and create new jobs. He will work to help struggling Americans reclaim the American Dream."

To paraphrase Michelle Obama, this conversation doesn't help my kids our economy. Even if Obama could conclusively prove that McCain is wildly over-optimistic in his assessment of the economy, that doesn't necessarily mean Obama has the better solution. 

The New York Times's business page has a pretty good assessment from Joe Nocera:

Indeed, [the Wall Street turbulence] is not all that different from what is going on in neighborhoods all over the country. Just as homeowners took out big loans and stretched themselves on the assumption that their chief asset — their home — could only go up, so did Wall Street firms borrow tens of billions of dollars to make subprime mortgage bets on the assumption that they were a sure thing.

That is the final parallel that exists between the housing market and Wall Street: the issue of moral hazard.

For over a year now, many Wall Streeters have complained about government efforts to forestall foreclosures, saying that it would create the expectation that everyone should be bailed out, and that consequently no one would learn important lessons about the dangers of taking more risk than they could handle. Besides, they added, the housing market was never going to improve until housing prices found their natural bottom. And that wouldn’t happen until the government stopped trying to prop up housing prices.

But in truth, you can say the same of Wall Street — it won’t learn any lessons, either, until firms that took foolhardy risks start to fail. One reason Lehman could not find a buyer over the weekend is because potential buyers were insisting on the same kind of taxpayer guarantees that the government had given JPMorgan when it bought Bear Stearns, or when it took over Fannie and Freddie. That’s the essence of moral hazard. When Treasury Secretary Henry Paulson refused to do so, the potential buyers went away. 

Upside? A few months ago, we thought the economy was in deep doo-doo because the price of oil had hit $147 per barrel. Today it's near or at $90 per barrel.

09/16 10:00 AMShare