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
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,
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.]
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:
“The 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
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
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 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
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.