Loans and Leadership

Thursday, 15 May 2008 01:57 By Paul Krugman, The New York Times | name.

    When George W. Bush first ran for the White House, political reporters assured us that he came across as a reasonable, moderate guy.

    Yet those of us who looked at his policy proposals - big tax cuts for the rich and Social Security privatization - had a very different impression. And we were right.

    The moral is that it's important to take a hard look at what candidates say about policy. It's true that past promises are no guarantee of future performance. But policy proposals offer a window into candidates' political souls - a much better window, if you ask me, than a bunch of supposedly revealing anecdotes and out-of-context quotes.

    Which brings me to the latest big debate: how should we respond to the mortgage crisis? In the last few days John McCain, Hillary Clinton and Barack Obama have all weighed in. And their proposals arguably say a lot about the kind of president each would be.

    Mr. McCain is often referred to as a "maverick" and a "moderate," assessments based mainly on his engaging manner. But his speech on the economy was that of an orthodox, hard-line right-winger.

    It's true that the speech was more about what Mr. McCain wouldn't do than about what he would. His main action proposal, as far as I can tell, was a call for a national summit of accountants. The whole tone of the speech, however, indicated that Mr. McCain has purged himself of any maverick tendencies he may once have had.

    Many news reports have pointed out that Mr. McCain more or less came out against aid for troubled homeowners: government assistance "should be based solely on preventing systemic risk," which means that big investment banks qualify but ordinary citizens don't.

    But I was even more struck by Mr. McCain's declaration that "our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."

    These days, even free-market enthusiasts are talking about increased regulation of securities firms now that the Fed has shown that it will rush to their rescue if they get into trouble. But Mr. McCain is selling the same old snake oil, claiming that deregulation and tax cuts cure all ills.

    Hillary Clinton's speech could not have been more different.

    True, Mrs. Clinton's suggestion that she might convene a high-level commission, including Alan Greenspan - who bears a lot of responsibility for this crisis - had echoes of the excessively comfortable relationship her husband's administration developed with the investment industry. But the substance of her policy proposals on mortgages, like that of her health care plan, suggests a strong progressive sensibility.

    Maybe the most notable contrast between Mr. McCain and Mrs. Clinton involves the problem of restructuring mortgages. Mr. McCain called for voluntary action on the part of lenders - that is, he proposed doing nothing. Mrs. Clinton wants a modern version of the Home Owners' Loan Corporation, the New Deal institution that acquired the mortgages of people whose homes were worth less than their debts, then reduced payments to a level the homeowners could afford.

    Finally, Barack Obama's speech on the economy on Thursday followed the cautious pattern of his earlier statements on economic issues.

    I was pleased that Mr. Obama came out strongly for broader financial regulation, which might help avert future crises. But his proposals for aid to the victims of the current crisis, though significant, are less sweeping than Mrs. Clinton's: he wants to nudge private lenders into restructuring mortgages rather than having the government simply step in and get the job done.

    Mr. Obama also continues to make permanent tax cuts - middle-class tax cuts, to be sure - a centerpiece of his economic plan. It's not clear how he would pay both for these tax cuts and for initiatives like health care reform, so his tax-cut promises raise questions about how determined he really is to pursue a strongly progressive agenda.

    All in all, the candidates' positions on the mortgage crisis tell the same tale as their positions on health care: a tale that is seriously at odds with the way they're often portrayed.

    Mr. McCain, we're told, is a straight-talking maverick. But on domestic policy, he offers neither straight talk nor originality; instead, he panders shamelessly to right-wing ideologues.

    Mrs. Clinton, we're assured by sources right and left, tortures puppies and eats babies. But her policy proposals continue to be surprisingly bold and progressive.

    Finally, Mr. Obama is widely portrayed, not least by himself, as a transformational figure who will usher in a new era. But his actual policy proposals, though liberal, tend to be cautious and relatively orthodox.

    Do these policy comparisons really tell us what each candidate would be like as president? Not necessarily - but they're the best guide we have.

 


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    Obama Casts Wide Blame for Financial Crisis and Proposes Homeowner Aid
    By Michael Powell and Jeff Zeleny
    The New York Times

    Friday 28 March 2008

    Senator Barack Obama called Thursday for tighter regulation of mortgage lenders, banks and financial houses, even as he spoke of pumping $30 billion into the economy to shield homeowners and local governments from the worst effects of the collapse of the housing bubble.

    Mr. Obama laid much of the blame for the crisis on lobbyists and politicians who dismantled the regulatory framework governing the energy, telecommunications and financial services sectors.

    Speaking at Cooper Union in Manhattan, Mr. Obama blamed Democrats no less than Republicans for the crisis that now casts a shadow of foreclosure and insolvency over millions of Americans. He did not mention former President Bill Clinton by name, but the target of his criticism seemed clear.

    "Under Republican and Democratic administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices," Mr. Obama said. "The result has been a distorted market that creates bubbles instead of steady sustainable growth, a market that favors Wall Street over Main Street but ends up hurting both."

    Mr. Obama, an Illinois Democrat, proposed to rebuild a regulatory structure without clamping too tight a hand on economic innovation. But he was unsparing in his view that industry lobbyists and weak legislators had failed to deal with the risks of a more complex financial system.

    "Instead of establishing a 21st-century regulatory framework, we simply dismantled the old one," he said, "aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight."

    Mr. Obama also took shots at Senator John McCain, the presumptive Republican presidential nominee. Mr. McCain argued this week against a vigorous federal intervention to address the crisis, saying Washington should not bail out banks and homeowners who in his view had knowingly taken on risky mortgages.

    Mr. Obama argued that such a response offered too little. "While this is consistent with Mr. McCain's determination to run for George Bush's third term," he said, "it won't help families who are suffering."

    Senator Hillary Rodham Clinton of New York also focused on the ailing economy Thursday while campaigning in North Carolina. She announced a $2.5-billion-a-year proposal to retrain laid-off workers.

    "We've had enough of a president who didn't know enough about economics and didn't do enough for the American middle class," Mrs. Clinton said in Raleigh. Referring to Mr. McCain, she added, "I don't think we can afford four more years of that kind of inaction."

    Mrs. Clinton's speech made no mention of Mr. Obama. Instead, she wanted to train voters' minds on a general election matchup between her and Mr. McCain.

    Mr. McCain "recently admitted, 'The issue of economics is not something I've understood as well as I should,' " Mrs. Clinton said. "And it turns out he'd rather ignore the credit crisis and mortgage crisis - or blame middle-class families instead of offering solutions on their behalf."

    The speeches of the Democratic candidates for the presidential nomination served as a reminder of the thin wall that separates their policy views. (Mrs. Clinton gave a speech this week in Philadelphia on the housing crisis.) Both candidates have talked about spending billions to help homeowners at risk of foreclosure, and are moving so closely in step that their subordinates have shouted about stolen ideas.

    Both warned of a national credit crisis and advanced proposals to amend bankruptcy laws to aid those facing housing foreclosure. Each endorsed Democratic legislation - sponsored by Senator Christopher J. Dodd of Connecticut and Representative Barney Frank of Massachusetts - to create a housing security program in the Federal Housing Administration that would provide incentives to refinance mortgages carrying onerously high interest rates.

    "They are very close; they are pointing to very similar proposals," said John Irons, research and policy director for the Economic Policy Institute, a labor-oriented research center. "There are minor differences, but when you compare their proposals with McCain, that's night and day. The Democrats are more like noon and 12:30."

    Still, differences of emphasis exist. Mrs. Clinton says the nation's financial difficulties are rooted in the housing slump. Mr. Obama took pains to cast the blame on what he said was decades of weakening of the nation's regulatory apparatus, and talked of more oversight of credit-rating agencies and requiring stronger capital requirements for complex financial instruments like mortgage-backed securities.

    Two of Mr. Obama's chief advisers for his speech served under President Clinton: Joseph E. Stiglitz was chairman of the president's Council of Economic Advisers, and Robert B. Reich was secretary of labor.

    Mr. Obama said the housing slump was a result of another of the bubbles that have distorted the economy in the past decade. Few doubted, he noted, that the nation needed to reform the 1930s-era law - the Glass-Steagall Act - that had erected a wall between commercial and investment banks. But, as Mr. Obama's aides noted, the banking and insurance industries spent more than $300 million on a successful effort to repeal that act in 1999.

    The resulting changes, Mr. Obama said, granted far greater freedom to investment houses without modernizing the regulatory regime and demanding transparency. The same pattern played out in regulation of home mortgages to bad effect, he said.

Last modified on Thursday, 15 May 2008 01:57