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Financial crisis
Article added on September 19, 2008
  
The conclusion that America lives on credit and on borrowed time is not new. In the context of the first 2000 Bush-Gore presidential debate I wrote: Americans live and consume on credit. Their savings rate is negative. The bubble could burst, a lot of people be left with debts, consumption slump and foreign capital leave America. An economic crisis would be the result. Neither of the two candidates seems to be prepared for such a (possible) scenario. A real leader would try to anticipate such a crisis and take the necessary steps to ensure a soft landing. They are either blind or do not want to confront the American public with negative, uncomfortable thoughts.

Thanks to Alan Greenspan pumping money into the system after 9/11, it took another eight years for the housing, subprime and financial bubble to burst; incidentally, the credit card bubble is till intact.

To pump money in directly after 9/11 and right now, as Secretary Paulson does, is surely the right thing to do. To tighten the monetary policy, to restrict the availability of credits was one of the big errors made after the 1929 crash. But unlike Alan Greenspan, you also have to know when to stop giving away easy money. 2008 is not 1929, but the situation is serious. Alan Greenspan surely wished now that he had never said that there could be no housing bubble.

[Added on September 20, 2008 at 00:51 Riga time: the United States Treasury Secretary Paulson and the Federal Reserve Chairman Bernanke have come up with a glorious plan that could cost taxpayers $600 billion or even more. Bankers and stock holders are happy because their jobs and money are saved by the bailout. Democrats and socialist may rejoice for the state seemingly taking a larger stake in and larger control of the economy. Was there no other solution? The bailout may just postpone the real solution of the bubble economy. The failed regulation of the mortgage and financial sector must be discussed. The taxpayers will end up with a lot of debt caused by others but with no real control. The culprits will not only get away unpunished, they will be rewarded for their greed and incompetence. The bad credits will end up in state hands. The corporate culture goes downhill. Fannie Mae and Freddie Mac, AIG and all other companies to come under de facto state control or to be helped by the government should quickly get in private hands to 100%. They must be sliced up in order to insure competition and to avoid other too-big-to-fail situations.]



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Barack Obama is not the man to lead in an economic crisis. He has no substantial record, even less so a bipartisan one.  He represents the old left-wing of the Democrats who believe in socialist and social-democratic recipes. He is more like Ségolène Royal in the French presidential election, whereas John McCain would be more like Nicolas Sarkozy, a man of the party in power, but at the same time a man who is ready for fundamental change, and who has proven to lead if necessary.

The United States do not need more state regulations, but better regulations. A strong state is needed. That does not mean that the government has to replace the free market. A strong state has to make sure that the market functions well, that there are no monopolies, oligopolies, cartels, subsidies and all kinds of protectionist measures. We are much more likely to get such a government with John McCain than with Barack Obama.

As Carly Fiorina pointed out in a recent interview: “T
he 2005 Bush-Cheney energy bill was full of giveaways to big oil companies. John McCain opposed it. Barack Obama voted for it.” She continued: John McCain voted against the 2008 farm bill, because it's filled with subsidies that increased the price of food. By the way, Barack Obama voted for it...” Fiorina also mentioned that “... John McCain has said for a number of years now that it is irresponsible that a Republican administration and a Republican Congress presided over a 60 percent increase in discretionary spending in the last seven years.

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Whenever there is a financial crisis, a stock market meltdown, a credit crunch or a housing bubble bursting, we can hear calls for more regulation, and voices who announce the end of capitalism and the free market.

To give mortgages to people who cannot afford them is not a sound business model. The subprime crisis is the result of state interventions. Fannie Mae and Freddie Mac are two government-created and government-supported enterprises. There is no need for the state to be active in the housing market. There should be no subsidies and no bailouts. Neither the Democrats nor the Republicans are ready to take that stance.

When it comes to Fannie and Freddie, Obama should be careful about what he says about the subprime crisis. Former Fannie Mae CEO Jim Johnson is (or was?) an Obama adviser. The former Fannie Mae CEO Franklin Raines is (or was?) another Obama economic adviser. [added on September 19, 2008 at 21:18 Riga time: both the Obama camp and Franklin Raines deny that Raines has ever been an adviser. They say that Raines has just been consulted by Obama staff, but neither on mortgage nor housing policy matters. That leaves us with Jim Johnson, who originally had to vet Obama's vp, but was forced to step down because his presence hurt the Obama campaign in the context of the mortgage meltdown. In addition, I could have added that Obama has taken more money from Fannie Mae and Freddie Mac than any other member of Congress, except the Democratic chairman of the committee that oversees them. You can of course argue that the sum is tiny in comparison with all the money Obama took. Still, his record is not clean. I could also have mentioned today's dirty Spanish language Obama ad which distorts statements by Rush Limbaugh. I could also have added that Obama's earmark account stands at some $930 million, more than Palin earmarked. Obama is the top of the ticket, he should compare himself to McCain, who has almost a clean record when it comes to earmarks].

[Corrected on September 20, 2008 at 15:34 Riga time: as early as 2003, President Bush pushed for stricter regulation of Fannie Mae and Freddie Mac. But not John McCain, as stated earlier. Those efforts were blocked by Congressional Democrats. In 2006 and not 2005, four Republican senators - including John McCain - sponsored regulatory reform legislation. The regulatory reform package may not have helped in the current crisis. It was supposed to tackle the accounting scandals of Fannie Mae and Freddie Mac, not the subprime meltdown. Still, McCain was attentive to mortgage problems, and where was Senator Obama?].

Senator Joe Biden suggested that paying higher taxes was “patriotic”. He basically meant that richer people should pay more. In short: other people's money. In the last decade, the generous Joe Biden gave an average of $369 a year to charity. Nobody hinders that champion of solidarity to give more of his income to the IRS.

Competition and transparency is what the economy needs, and the government has to supervise, to make sure that those principles are respected by all economic players. The state has to ensure the functioning of the markets and not to replace them. Economic cycles are part of the business world. Greed and bubbles will accompany us in the future. As long as the state is not involved and as long as one player does not dominate a market, nobody will be too big to fail.

If ever the government has to step in, the responsible company leaders and decision makers have to be held accountable. If they cheated, ignored corporate rules and guidance, even with their private savings and pension funds.

Because the economy of the United States of America is freer than most other economies, it will overcome the current financial crisis. More than ever, a champion of free trade such as John McCain is needed right now, not a protectionist such as Barack Obama.





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