The Good, the Bad and the Ugly: John McCain’s mortgage plan

March 30, 2008

A look at McCain’s response to the ‘crisis’

John McCain revealed his plan for sorting out the sub-prime crisis in a speech earlier this week. Having received criticism for stating that, ‘the issue of economics is not something I’ve understood as well as I should’, his statement on a key economic issue had been eagerly awaited. The fact that, despite corporate leverage being well below the historical average, the so-called sub-prime mortgage ‘crisis’ and the ‘credit crunch’ has driven banking financial regulation up to the top of the agenda in the minds of both commentators and investors alike. Although the initial reaction has been generally dismissive, with His speech, and the philosophy it suggests a McCain administration would adopt, were definitely a mixed bag.

The most positive signal was that McCain is still clear that he is not generally a fan of government bailouts or subsidies, stating that ‘I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers’. He also emphasised that, ‘no assistance should be given to speculators. Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes. Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren’t’. Both of these statements are consistent both with his record as a crusader against government waste and a fan of free-market principles, but also with his dislikes of anything which smacks of special pleading or interest group politics. This is no different from his principled refusal to pander to either the auto industry in Michigan or the Ethanol industry in Iowa.

McCain’s quite sophisticated grasp of economic policymaking was demonstrated by his pledge to, ’convene a meeting of the nation’s accounting professionals to discuss the current mark to market accounting systems’. Accounting reform may not be the pivotal issue of the election but it is something which is a serious problem and is one of the few issues where the government needs to play an important role in standard setting. Indeed, another accounting issue, the failure to treat stock options as a cost was one of the main driving forces behind the double whammy’s of the internet bubble and the surge in corporate malfeasance eight years ago. Critics may paint McCain as a hothead, and pick a few quotes out of context to paint him as someone who is not a fan of sophistication, but he has shown a greater willingness to focus on the less glamorous sides of policy talk, such as institutional reform at the UN or poverty in Latin America, than either Obama or Clinton.

However, amongst his general pledge to stand firm against calls for easy solutions, there were some less positive signals. McCain qualified his opposition to bailouts with the belief that the Federal Reserve should act to curb, ‘systemic risk that would endanger the entire financial system and the economy’. Although most people, including myself, would agree with government action in an emergency, McCain then suggested that he would take a relatively liberal decision of what constituted ‘systemic risk’ by stating, on the question of whether the bailout of Bear Stearns was a mistake, ‘It’s a close call, but I don’t think so’. This is worrying because both bureaucrats interested in expanding their empires and the individuals who are looking for a bailout are very willing to invoke hyperbole, including apocalyptic visions of another Great Depression, if they believe that by doing so they can get their way.

The most worrying quote is his pledge to ‘convene a meeting of the nation’s top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers’. On the face of it this sound innocuous enough, after all moral suasion has been the tool of central banks since time immemorial. Also, there is a strong case for helping families who were honest about their incomes and have hit hard times. However, such action tends to create a quid pro quo attitude among bankers, making bailouts much more difficult to prevent. At the same time, because the ‘soft-power’ of central banks is less overt and more politically acceptable, it is harder to rein in when it spreads too far and discourages enterprise. There is also the question of how banks can ‘work together’ on mortgage lending without reducing the level of competition between them in other areas. After all, it is because of America’s strong anti-trust laws that America’s financial sector leads the world in financial innovation and productivity. The only hope is that McCain’s pedestrian delivery hides the fact that he is not comfortable with this aspect of his plans.

However, this plan is a good basis from which to start and is clearly better than that of the two main Democratic politicians. Both Clinton and Obama seem willing to use a combination of taxpayers’ money and changes to the law, including the voiding of many of the securities underpinning these loans, to attempt to tackle this crisis. While their concern for the impact of the declines in house prices on average families is commendable, the fact is that the financial system is not an extension of the welfare state and should not be used to tackle deeper structural problems. The proper way to fix the social exclusion caused by failing schools and industrial decline, as McCain himself has said, is to tackle these problems directly, through education and trade adjustment assistance, rather than through financial policy. Indeed, Obama’s and Clinton’s fondness for short-term solutions, such as bailouts and a protectionist trade policy, are the political equivalent of a neutron bomb, threatening the dynamism of the US economy without addressing the core social problems.



  1. They are all willing to use our money to regulate us to no end. It is not just “this one” or “that one” But any elite politician is paid off by the special interest groups.

    Stop companies from being able to donate and lobby, and you can have America Back, otherwise, America is going down the tubs, and fast. McCain, Obama, Clinton & Bush. All of them are not worth the air they breath or the space they take up.

  2. Please watch the movie the 11th hour!

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