Obama takes the control freak approach to the economy

Fox News:

The government must revive the economy by tightening regulations and reforming its own agencies to adjust to the realities of modern finance, Barack Obama said Thursday.

In a speech billed as a major address, the Democratic presidential candidate said most experts agree the U.S. economy is in a recession.

“To renew our economy — and to ensure that we are not doomed to repeat a cycle of bubble and bust again and again — we need to address not only the immediate crisis in the housing market; we also need to create a 21st century regulatory framework, and pursue a bold opportunity agenda for the American people,” Obama said.


“If we can extend a hand to banks on Wall Street, we can extend a hand to Americans who are struggling,” he said.


This last bit of demagoguery is typical for Democrats. It ignores the fact that in helping the banks you save the depositors' money and the government money because it does not have to step in later when the situation is worse. As for the owners of the bank, they were the big losers in the Bear Stearns deal. McCain does a little better according the the Wall Street Journal.


The best part of Mr. McCain's approach is his description of how we got into this mess. He doesn't merely blame Wall Street or "predatory" lenders, though he does fault both along the way. Instead, he offers a largely accurate description of how the housing and credit bubbles arose, driven by lax lending standards fed by a belief that housing prices could only go up. Then add some financial innovation that is now being stress-tested -- and found wanting.

The major flaw in this presentation is that it leaves out the Federal Reserve, whose far too easy monetary policy helped to create the subsidy for mortgage and other debt in the first place. But the virtue of Mr. McCain's overall diagnosis is that it doesn't treat all borrowers as victims, and instead assumes that everyone shares some responsibility for getting wrapped up in the housing mania.

Refreshingly, too, the Arizona Senator framed his policy response around personal accountability for bad choices. He thus rejected one favorite Bush White House-Democratic idea of the moment, which is to lower or drop the downpayment requirement for loans backed by the Federal Housing Administration. As Mr. McCain pointed out, such no-downpayment loans were part of the mania problem. One reason the FHA has fewer subprime problems than private lenders is that its borrowers had skin in the game.


There is more in both pieces. That last quoted paragraph captures the mortgage end of the leverage problem where the borrower has little stake in the investment. The problems in the derivatives market that slices and dices the mortgage backed securities needs more attention.

The fundamental question is whether these products are fit for purpose as the Brits say. Their original rationale was that they increased the liquidity for mortgages making more money available for that market. As the derivatives became more "sophisticated" they were also touted for their ability to hedge against market movements in general. It is reasonable to question at this point if either rationale is still valid. The failures in the subprime market has resulted in less money being available for mortgages. The performance as a hedge is also questionable considering the losses incurred by people and companies who have invested in them.


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