barack obama, Credit Crisis, credit crunch, debt, election '08, Fannie Mae, Freddie Mac, george w. bush, Henry Paulson, housing crisis, john mccain, mortgage crisis
In American, Politics on July 22, 2008 at 3:58 pm
Henry Paulson’s proposed bailout of Fannie Mae and Freddie Mac has justifiably sparked a lot of debate. I won’t attempt to add to that, but I’ll simply direct you to a few predictions and rants by frustrated economics professors: here’s one by Paul Krugman, here’s one by RGE Monitor’s Nouriel Roubani, he cites one by Willem Buiter in the FT. Then there’s another one published by the Wall Street Journal. All of these are worth reading, and they all have differing opinions about the severity of the problem and who is really to blame. However, as with most crises, there isn’t just one group at fault, but a number of different complicit wrongdoers. Certainly, the two mortgage giants and the financial industry in general were overzealous in selling and packaging mortgages that perhaps didn’t deserve to exist and the government stood by so idly that they are rightfully accused of negligence. Even American consumers are duly ridiculed for their rampant debt accumulation. But placing blame is one thing, solving the problem is another.
Part of the difficulty in addressing this problem is that it seems to require altering economic behaviors that are part of the American identity. The American economy is designed—through a number of mechanisms—to promote radical risk-taking and innovation. That general attitude is not something we will change, nor is it necessarily something we should abandon. However, we clearly crossed a line into excessive risk-taking, and we need to send a message that we should take a step back at every level. Sending a message that condemns excessive risk-taking without opposing the practice in general is a politically difficult maneuver, but one that presidential and congressional candidates will have to make.
One way of addressing this might be by making this the new debate over “values”. Previous elections were one or lost based on claims to having superior values on issues of moral import like gay marriage, gun rights and abortion. I could see the candidates addressing these economic problems with the same language of values—starting a journey back to the “culture of thrift” perhaps, as David Brooks calls it. One candidate could (should?) claim that they are the candidate of responsibility, the torch-bearers of the protestant work ethic that used to have Americans spending what they had and, as a result, having more to spend; a candidate that could reintroduce us to the values of modesty and hard work. This seems like a traditionally Republican mantra, but the Bush era of fiscal profligacy lost them that mantle. McCain could make this turn to traditional values, but his support of the Bush tax cuts loses him some credibility. Obama doesn’t exactly seem like a fiscal conservative either, but he could argue that having the government spend more on health care and education helps keep people out of the debt that is perhaps the root of this problem. Whether or not either candidate picks up this undertone, it is clear that getting out of the credit crisis will require more than a new set of regulations; it may require a more substantial change towards a new set of values and social ideals. What are those values and does either candidate have the capacity to lead us down that path towards change? I think those questions deserve some discussion.
consumer debt, economics, election '08, financial literacy, financial transparency, mortgage crisis
In Uncategorized on July 22, 2008 at 2:59 pm
There’s been quite a lot of discussion recently about the crippling burden of debt faced by many Americans, and understandably so – the rippling effects of the mortgage crisis have a number of analysts suggesting that the U.S. economy is heading towards recession.
Unfortunately, it doesn’t seem that many lessons from the recent crisis are especially clear, at least as far as policy prescriptions might go. While it is true that many lenders were certainly irresponsible, many borrowers freely admit that they were, too. And while the availability of easy credit certainly contributed to the growth of debt, it’s important to recognize that, in general, access to credit is a very positive thing, provided that it is offered and taken responsibly, with rational pricing of risk all around. To put it more concretely, while access to credit and the resulting growth of debt led to many Americans losing their homes, access to credit helped put some of them in those homes in the first place, and it helped others improve aspects of their lives, if only in the short term given how events played out. Without excusing irresponsibility on the parts of the various players involved in the recent debt crisis, I think it’s essential to note that addressing the problems in these markets entails what might end up being a fairly delicate balancing act, and that the parameters governing such an act aren’t necessarily known.
I can’t help but wonder, though, if we wouldn’t be able to achieve a lot by focusing on some of the informational aspects of the decisions made by consumers. Specifically, I wonder about the role financial illiteracy and opacity played in convincing borrowers to take on risky high-interest-rate loans of various sorts. Was it the case that many borrowers didn’t understand the economic risks they faced in general (e.g. the risk of medical emergencies or layoffs), some of which might be large enough to force them to default? Did they, perhaps, fail to understand the risks associated with ARMs, or the terms underlying their credit-card debt, or the specifics of any of the myriad of other debt instruments that were purchased? It’s an empirical question, surely, though I think it’s somewhat intuitive: who hasn’t been at least somewhat confused by the terms and fees associated with a bank account or credit card? If it is indeed the case that these sorts of misunderstandings were important in the evolution of the current financial crisis, perhaps there is a role to be played by government in promoting financial education or enhanced transparency of financial contracts, independently of any regulation of the terms of those contracts.
From what I know of the literature in general, the evidence about the efficacy of financial education and transparency interventions is mixed. But I can’t help but think that it’s important to continue exploring this area. The economic world becomes more complex every day, and it seems that the importance of the effective management and transmission of information grows with it. Perhaps focusing on better financial education and transparency on the ground will prove to be a more valuable (and workable) approach than playing an outmoded blame game.
What do you guys think?
barack obama, Campaign Finance Reform, free speech, john mccain, political liberty, Public Financing
In Politics on July 22, 2008 at 10:45 am
This issue occurred about a month ago, but I have not had the chance to write on it yet, so I thought I would this morning.
Sen. Barack Obama became the first major-party presidential nominee to reject public funds, turning down $85 million in taxpayer money on June 20th. This was a reversal of his earlier pledge with his opponent Sen. McCain.
By rejecting public funding, Obama gains a large fund-raising advantage. Obama has had no problem bringing in money or appealing to new donors, raising $52 million last month alone. He has relied on small online donations as well as large donations. No doubt these trends will continue in months to come.
Obama stated that it was not an easy decision for his campaign to make because he is and has been a strong supporter of public financing. It seems that the competitive advantage gained by turning down the funds—and the spending limits that accompany them—was too great to pass up. Obama will now be able to outspend McCain in swing states as well as spend money in historically Republican markets.
My concern is not with the direct implications of Obama’s decision—though I think they too are in some ways regrettable—but with the greater effect it will have on campaign finance reform. A great opportunity has been missed. Instead of having both major-party candidates championing the cause of reform, public financing is nearly dead.
Why is a setback to campaign finance, and especially public financing of elections, deeply regrettable? I argue that positive measures like public financing and their accompanying spending limits are needed in order to ensure fair value of the political liberties. Each citizen in a democracy should have fair and equal access to the political arena. However, the space of the political is limited and without a guarantee of fair value, there is little to stop those with greater property and wealth, and the greater skills of organization which accompany them, from controlling the electoral process to their advantage. It has yet to be seen how this specific election will play out. Hopefully these two major-party candidates will be more sympathetic to all voices than those in the past have been.
Without public financing, we move further away from having a political procedure which secures for all citizens a full and equally effective voice in a fair scheme of representation. Formal equality is not enough to secure truly free speech. The Obama campaign has moved us further from this goal.
“The First Amendment no more enjoins a system of representation according to influence effectively exerted in free political rivalry between unequals than the Fourteenth Amendment enjoins a system of liberty of contract and free competition between unequals in the economy,” John Rawls, Political Liberalism.
barack obama, china, climate change, developed countries, developing countries, development, energy, environment, G8, george w. bush, india, john mccain, mexico, oecd, Politics, russia, third world
In Politics on July 22, 2008 at 8:18 am
I wrote the following in relation to a New York Times article during the G8 summit, but the message is relevant for election ’08. A major difference between Obama and McCain will be how they approach the host of countries considered “developing” as they direct their foreign policy. Since climate change diplomacy was the subject of the G8 meeting, I took a quick look at what both had to say regarding how they would address the developing world. McCain’s website talks about the need to integrate “India and China” into any climate change initiative—this could be a repetition of the Bush demand that those two countries be involved in any new agreement, but it could also mean that McCain understands their importance in addressing global warming and understands that they require a different approach. Obama’s website suggests that he wants to create a “Global Energy Forum” including the G8 and the same “outreach 5” from the G8 summit, except he wouldn’t make India, China, Brazil, Mexico and South Africa sit at the kiddie table. These websites are probably not the best predictors of what policy might come out of a McCain or Obama presidency but, at least on climate change, it does show that the two candidates might be moving a little bit past the dubious distinction between “developed” and “developing”. With all that said, here was my take on the matter, as of July 9th:
The debate over climate change between developed and developing countries (or, perhaps more accurately, between George W. and China) points to the fact that the distinction between “developed” and “developing” is of decreasing utility. Most often, this distinction is made with reference to per capita GDP, which alone demonstrates the ineffectiveness of the definition. Russia (a G8 member, although on the outskirts by most people’s calculations) is ranked #54, which is a mere 4 spots ahead of Mexico. The difference between them is less than $600 per person. What makes this distinction more ironic is that Mexico is a member of the OECD (another rich country club; South Korea is another member) and Russia is left out of that one. Brazil and South Africa, two other members of the “outreach five” are within the next ten. To be fair, the difference between the two main agitators–the US and China–is nearly 100 spots on the list of 179 ranked countries and the US average per capita income is roughly 20 times that of China, but this whole line of argument presupposes that GDP per capita is a useful measurement for assigning obligations when it comes to international policymaking. Perhaps more useful measurements would look at a country’s total GDP or its share of international trade, because those would demonstrate a country’s clout when taken as a whole. Both measurements completely muddle the field. For example, the US ranks highest in total GDP and China is third highest behind Japan. On this basis, is China a developed country and the UK, France, and Italy are developing? Or, more generally, who is developed and who is developing? The point here is not to clarify or answer that last question, but to demonstrate that the segregation is utterly meaningless.
Perhaps what would be better is to think about this on a case by case basis, and in the case of international environmental regulation, this group should probably be unified. The problem is that these countries use their designations as political tools. China uses its “developing” status to argue that this problem was created by past (now developed) emitters, therefore it is their responsibility, and that it is their right as a developing country to emit freely as a part of the development process. On the other side, the US (or, again more appropriately, George W.) would like to dictate the course of action as the “developed” nation and demand that the “outreach 5″ sign on. The two countries are hiding behind a flawed economic distinction and reaping their benefits through political posturing. The reality is that in this situation, nobody is developed or developing, but everybody is screwed if we don’t do anything. Both groups of countries should probably have the same rights and responsibilities, because as far as the environment is concerned, we are all about equal. The problems with this distinction go beyond environmental regulation to a number of other issues (read: UN security council, WTO, regulation within the IFIs and pretty much anything else you can think of that would fit in here) but I won’t address them all right now. However, questioning of the developed vs. developing distinction and its normative implications needs to happen. In each of the areas I’ve mentioned, a country’s designation as developed or developing has unnecessary and often harmful implications. Any suggestions?
