 The transcript of President Bush’s economic speech in the New York Times is a primer on the growing financial crisis, emphasizing the root cause and the need for major long-term reforms.
President Bush issued a call for Barack Obama and John McCain to meet with White House and Congressional leaders to foster an expedient solution to the financial crisis in a Wednesday evening address to the nation.
Already concessions appear to be forming on both sides, according to another New York Times article (September 25, 2008, “President Invites Candidates to Meeting”).
Republicans have signaled their willingness to agree to protections for taxpayers, pay limitations for executives of financial institutions seeking help, and bipartisan oversight of Treasury Department actions. There also has been a shift in tone – not just the failure of financial institutions is at risk, but the economy in general and the economic future of all Americans – reports the New York Times.
For their part, Democrats also are making concessions: agreeing not to push for changes in the authority of bankruptcy judges to allow them to modify mortgages (an idea opposed by Republicans as subverting authority of banks) and signaling a greater inclination to authorize the entire $700 billion requested by the Administration plan, with expenditure of only $150 billion at first to see how well the plan is working. Also, Democrats have won the Administration’s pledge to aid community banks hurt by the Fannie Mae and Freddie Mac problems and to do more to prevent foreclosures.
Fear Factor
President Bush described a “distressing scenario” that would unfold if Congress does not act quickly and Americans, gripped by fear, begin to panic.
Invoking the specter of widespread fear and the economic calamities that could ensue could be puzzling to Americans. Why use the bully pulpit to publicize the very thing the President and the nation hope to avoid?
In this extremely volatile election season – brought to a head yesterday by McCain’s urging to postpone the first presidential debate and Obama’s insistence it go on – the scenario of widespread fear and economic panic may be the only force able to quiet the partisan storms long enough to focus on the immediate crisis.
A Wall Street Journal article (September 25, 2008, “Paulson’s Deal-Making Skills Face Crucial Test”) says the leverage of fear is the trump card because no one in Congress wants to be responsible for the collapse of the American economy.
The Root Cause
It’s unlikely that partisan banter and blame will subside completely, and both sides likely share culpability for the root cause of the financial crisis early in the decade, described by Bush (low interest rates, easy credit, generous loans to first-time homeowners and entrepreneurs, unintended negative consequences, faulty assumptions, excesses and bad decisions and the pervasive false hope that housing prices would continue to rise and cheap credit would continue to be available).
Although Americans may find the greatest solace in pointing fingers at Washington and Wall Street, they too may need to acknowledge they are now paying the piper for grandiose “good times” perceptions that were fueled by a possibly myopic view of interest rate reductions and a tendency to avoid dwelling on the prospect of “the law of unintended consequences.”
This point is made in a Fortune Magazine article (September 15, 2008, “Fannie, Freddie, Ben and Alan”) which examines how the media and the public extol the benefits of lower interest rates (cheap credit for everyone, including people who are clearly high-risk in their ability to pay back loans), but ignore negative repercussions.
As the Federal Reserve cut short-term interest rates, the spread between short-term and long-term interest rates grew, and that fueled carry-trade investors who try to make a profit on the spread. Fortune notes that short-term rates began to rise and the value of the assets (housing, in this case) declined.
People who expected the waves of low-interest teaser rates to continue (both in the purchase of homes and residential properties intended to be flipped for profit) were caught short. So were Fannie Mae and Freddie Mac, purveyors of many of these high-risk loans, as well as Congressional representatives seeking broad extension of the joys of home ownership, notes Fortune.
Democrats in Congress, in particular, jumped on board the bandwagon for “more affordable housing” through a ballooning of subprime mortgages, which Fannie Mae and Freddie Mac saw as a sort of political redemption in the wake of accounting scandals in 2003 and 2004, says the Wall Street Journal (September 23, 2008, “Blame Fannie Mae and Congress for the Credit Mess”)
The Wall Street Journal asserts there is an element of hypocrisy in Barack Obama’s track record in now criticizing the financial regulatory environment, but not so much with John McCain “since he has been pointing to systematic risks in the mortgage market and trying to do something about them for years.”
In any case, the daunting task of revamping financial regulation (“Our 21st century global economy remains regulated largely by outdated 20th century laws,” Bush said last night) must be deferred until after dealing with the more immediate situation, the White House says. The President urged Congress to consider ideas in a regulatory blueprint introduced by Treasury Secretary Paulson earlier this year (see AOH, March 31, 2008, “Treasury Dept.’s Blueprint for Regulatory Reform”) and not take actions that “end up hampering our economy’s ability to grow."
A Bigger Hurdle than American Politics?
The financial crisis confronting Americans cannot be adequately addressed by the U.S. alone and attempts to do so could actually be detrimental, according to The International Economy editor David Smick, author of The World Is Curved: Hidden Dangers to the Global Economy,” in a Fortune Magazine article (September 24, 2008, “The Clueless: Why Neither Presidential Candidate Knows What’s About to Hit Him”).
Smick points to the shaken confidence of global investors and the lack of transparency with toxic high-risk home mortgages “securitized into obscure financial instruments.” The financial crisis, he says, is one that must be attacked on a global scale.
He advocates an international meeting akin to the 1944 Bretton Woods Conference that created the international monetary system after World War II after the new U.S. president takes office. He admits this presents an even bigger hurdle than American partisans setting aside their differences now: "Huge amounts of global capital are held by non-democratic regimes that aren't in a cooperative mood” and democracies have plenty of "weak political leadership."
The Challenge for Americans
Loyola Law School Professor Lauren Willis has said that financial education is a waste of time and maybe even counter-productive for Americans in distress (see CNNMoney.com, August 26, 2008, “Why You Can’t Teach Money”); however, it has also been said that those who don’t learn from history are doomed to repeat it.
It is true that today’s global economy is highly complex and in the U.S. much of the reportage tends to be highly negative (see AOH, August 22, 2008, “Relentless Pounding by Economic Reports,” and AOH, August 27, 2008, “Life beyond the Numbers”).
A good first step for lay news consumers – and reporters can aid in this – is to keep a big-picture perspective and not to ignore the strengths in the economy – which may represent 90 percent – to singularly focus on the painful parts – which may be 10 percent. As Fortune Magazine (September 17, 2008, “Recession or Not?”) notes, not only is the U.S. far from meeting the formal definition of “recession,” it actually has been growing steadily, albeit slowly, but still better than other peer nations.
Likewise with unemployment and foreclosures – although no one gives short-shrift to the suffering of people represented by a 6.1 percent unemployment rate, almost 94 percent are employed. And, if 10 percent of home mortgages are in some phase of difficulty, 90 percent are still being paid on time.
The psychology of being afraid about the future increases fear and vulnerability and can cause people to exaggerate the bad news and ignore the good, notes Fortune.
In addition to keeping a big-picture perspective, the lay news consumer can also strive to develop an enriched perspective, even if extensive financial education is not realistic, as the Loyola professor has claimed.
For example, lay news consumers can deepen their appreciation of the delicate balancing act that needs to occur in addressing the financial crisis. They can read articles such as Bloomberg’s September 24th piece, “Paulson Seeks Mortgage Value That Eluded Bear, Lehman,” which focuses on the critical question of determining the value of the bad mortgages that are at the center of the debacle.
The article explains the balancing act involved in protecting taxpayers without causing greater difficulties for banks (more bank problems ultimately are not likely to serve the interests of taxpayers).
Consider also, news reports that appear to convey that troubled homeowners are not being rescued because of a lack of concern by policy makers, may not equip news consumers with facts as well as one that explains that the U.S. Treasury can do little to restructure many of these mortgages because “90 percent or more, by some estimates, are inside giant pools or trusts, which have in turn sold bonds with different levels of seniority to institutional investors around the world,” as reported by the International Herald Tribune (September 23, 2008, “U.S. Rescue for Mortgage Industry, but Not for Homeowners”).
Americans have a vital individual role to play in seeking to understand the current financial crisis fairly and objectively and to acknowledge the difficult task that confronts policy makers seeking to assuage fears of constituents while also acting in the long-term interests of financial markets.
Likewise, when buying a home, Americans have a wide range of resources available to help determine if ownership is comfortably within their financial reach (see “100 Questions and Answers about Buying a New Home” on the Housing and Urban Development web site) – and can use those resources to exercise independent judgment.
|
Special service for policy makers and journalists:
Email AO for top scholars, institutions, studies, and research in this issue area
Be the first to comment on New York Times : Financial Crisis: Balancing Act
|
