Cognitive Dissonance on the Credit Crisis

This morning economic advisors from the Clinton campaign, the McCain campaign, and the Obama campaign have published their candidates’ prescriptions for dealing with the credit crisis in the Washington Post. Writing for the Clinton campaign, Gene Sperling’s recommendations are here; writing for the McCain campaign, Douglas Holtz-Eakin’s recommendations are here;and writing for the Obama campaign, Austan Goolsbee’s recommendations are here.

I believe that any plan that will genuinely deal with the credit crisis must have four components: it must staunch the current bleeding to prevent further deterioration, it must take steps to deal with the causes of the crisis, it must introduce measures to prevent the problem from recurring, and it must begin steps to return our government to fiscal health. The three prescriptions have all four of these components but not in any one prescription.

I see nothing in Gene Sperling’s exposition of Hillary Clinton’s position that would deal with the current problem (unless you believe that the current problem can be solved by handouts to borrowers and punishment to lenders) but it has plenty of criticism for the Bush Administration and the Federal Reserve (which I believe it has confused with the Treasury Department). It does have some tantalizing hints of Sen. Clinton’s views on righting the fiscal ship’s course. Under President H. Clinton we can expect higher personal and corporate taxes and handouts for a class of Americans of unknown size:

The answer does not lie in extending high-income tax cuts or in expensive new corporate tax cuts. Nor is it in creating a spate of new government bureaucracies. Hillary Clinton supports policies that empower Americans directly to achieve greater economic security and upward mobility: a health-care tax credit that goes directly to you; a $1,000 matching tax cut that goes directly to your savings account; and higher education tax cuts that go directly to pay for your or your child’s tuition and dreams of a better future.

There’s plenty to like in the strong market orientation of Douglas Holtz-Eakin’s exposition of Sen. McCain’s views. Here are the principles spelled out for handling the credit crisis:

John McCain will not play election-year politics with the mortgage crisis. In evaluating any proposal, he will apply four principles: (1) No taxpayer dollars should bail out real estate speculators or financial market participants who failed to do due diligence in assessing credit risks. (2) Any financial assistance should be accompanied by reforms that ensure that we never face this problem again. (3) Too little equity — small down payments by home buyers and too little capital at our financial institutions — was a source of the housing and credit problem that must be reversed. (4) Where government assistance is merited, lenders and homeowners should make financial sacrifices to qualify.

Unfortunately, how these principles would deal with the immediate problems at hand aren’t at all clear to me. Perhaps it’s just me but I also detect a slight whiff of social Darwinism in the views expressed.

I also found some extremely interesting and creative suggestions in Austan Goolsbee’s explanation of Sen. Obama’s views. The proposal for solving the present problem includes incentives and guarantees (at unspecified cost) for lenders to convert mortgages that exceeds the value of homes (don’t the total value of all mortgages exceed the value of the homes they’re on?) to 30 year fixed rate mortgages at a lower rate and an intriguing interest rate subsidy for low and middle-income borrowers. I’d really like to see the details of the economics of this spelled out and may try to winnow it out of the info on Sen. Obama’s web site. There are also proposals for extending unemployment benefits (which seems to me like a better idea than the “tax rebate” checks that have been approved already). The preventive measures include increased regulation both in the mortgage and credit card industries. I don’t see the urgency for credit card reform but perhaps someone can explain that to me.

All three of the sets of proposals are absolutely chock full of poor assumptions. The nostalgic 1950’s-flavored Clinton proposal assumes an inclination to tax and spend with more facility than I believe is politically possible today. The highly market-oriented McCain plan sees markets where there are no markets. The visionary Obama proposal stops just short of the finish line and trips over a a stumbling block of populism.

I guess hardnosed, pragmatic solutions won’t fit on bumper stickers or into 20 second spots.

2 comments… add one
  • I agree that the Obama proposal (to the extent one can judge such things from such statements) may be the best among them.

  • Yeah. A little distressing the way it descends into populist claptrap there at the end but otherwise a pretty interesting proposal.

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