CAMPAIGN OUTSIDER 'It's the economy, McCain!
By Muhammad Cohen
HONG KONG - The hurricane sweeping across financial markets gives Republican
presidential candidate Senator John McCain another opportunity to show how
poorly he understands the economy. More importantly, McCain again demonstrated
that the only thing he takes seriously about running for president is winning.
The prospect of financial meltdown focused both campaigns on James Carville's
maxim from Bill Clinton's 1992 run, "It's the economy, stupid." In response,
McCain unfolded more zigzags than a Cheech and Chong routine.
Last Monday, after a weekend of failed efforts to rescue investment bank Lehman
Brothers, Merrill Lynch preemptively
sold itself to Bank of America, and insurance giant AIG (American International
Group) teetered on the brink of insolvency, the Republican presidential nominee
declared, "The fundamentals of our economy are strong."
Democratic candidate Senator
Barack Obama attacked the remark, so McCain, the
old navy man, came back with,"The American economy
is in crisis." He added, "Too many people on
Wall Street have been recklessly wagering instead of making
the sound investments we expect of them. I can assure you if I'm president,
we're not going to tolerate that any more."
Then McCain's campaign put out an ad, reportedly taped in 10 minutes. "I'll
meet this financial crisis head on. Reform Wall Street. New rules for fairness
and honesty. I won't tolerate a system that puts you and your family at risk.
Your savings, your jobs - I'll keep them safe." That's great, John, but how?
You forgot to say, "Stay tuned."
On Tuesday morning, McCain was against a government bailout for AIG. Later in
the day, when the George W Bush administration announced its US$85 billion plan
to keep the global insurer afloat, McCain said he'd support it. He also called
for a 9/11 commission-style investigation into the crisis, as if its causes are
shrouded in mystery to anyone but, perhaps, him.
Then, hot on the heels of an adviser's claim that McCain, who can't send an
e-mail, invented the Blackberry, McCain said he'd tried to fix Fannie Mae and
Freddie Mac in 2005. That would be more significant if McCain had mentioned it
while those two federal mortgage agencies were teetering in recent weeks and
the government was unsure about a bailout.
If McCain had a plan to fix Fannie and Freddie, you'd think he would have
mentioned it while mechanics had the agencies up on the lift. But McCain's
alarm was just part of Republican standard practice of crying wolf for decades
about Fannie and Freddie, whose government backing was previously shrouded in
ambiguity. A stopped clock is right twice a day.
With another reach into his top hat, McCain conjured up a scapegoat for the
crisis. He said he'd fire Securities and Exchange Commission (SEC) chairman
Christopher Cox, a Bush administration appointee. Cox heads the five member
bipartisan commission that regulates stock markets, and McCain was blaming Cox
for SEC rules "that let speculators and hedge funds turn our markets into
McCain complained specifically about regulations related to short selling,
betting that a stock's price will fall. Short sellers are supposed to borrow
shares in the stock before short selling it; otherwise it's known as "naked
shorting" and against the rules. The SEC has cracked down under Cox, taking its
latest steps against naked shorting just before McCain leveled his guns at Cox.
The uptick rule prohibited short selling a stock until its price rose. As
reported by the Wall Street Journal, studies by the SEC and a range of
academics concluded the uptick rule had no impact on share prices, and after
years of urging, the SEC scrapped the uptick rule last year. The Journal also
reported that short interest in financial stocks - at the center of current
stock market woes - declined in August. That undermines McCain's point that
speculators are causing the fall in market.
Heads I win, tails you lose
By the end of the week, McCain had turned his fire in another direction. He
proposed a Mortgage and Financial Institutions Trust to help distressed
lenders. While saying he's against government bailouts, McCain's proposal
essentially opens a permanent federal loan window for bankers to use when they
choose, without consequences or stipulations to prevent them from continuing
the practices that got them in deep water.
McCain's new agency would institutionalize the principle that profits belong to
the private sector but losses belong to taxpayers. And, of course, raising
taxes on corporations or the wealthy benefiting most from financial sector
bailouts, Republicans contend, is counterproductive, so the poor and middle
class need to foot the bill.
Aside from contradicting himself, McCain's rants and remedies advertise that he
really doesn't understand the problem. Remember, he isn't just a guy on the
street or some small state governor who takes pride in how little she knows.
McCain's not only a 26-year Capitol Hill veteran, but he served as the chairman
of the Senate Commerce Committee. As McCain himself put it, to excuse accepting
campaign contributions from executives under his committee's oversight, the
Commerce Committee supervises the "entire US economy". But aside from
contributions, McCain didn't take in much as chairman.
Speculators didn't cause the current financial crisis any more than they caused
the rise in oil prices. Excessive demand for oil caused prices to rise, and
excessive greed caused Wall Street's woes. In both cases, government failures
played a part. Jimmy Carter was the last president to take energy policy
seriously, so the US remains addicted to petroleum while demand skyrockets from
the developing world, particularly China.
The financial crisis traces back to bad mortgage lending and unlimited risk. As
financial regulations were systemically loosened, unregulated lenders
multiplied. They found it profitable to write mortgages for buyers who couldn't
possibly pay them, bundle the loans, and sell them as secure financial
instruments. Blue chip financial institutions could plump their returns by
loading up on these dodgy securities, overpriced property and other chancy
assets using unlimited leverage. Government needs to step in and enforce ground
rules, in the form of more regulation.
Gurus Keating and Gramm
McCain should remember something about financial regulation. He opposed it
during the 1980s at the behest of his contributor Charles Keating, head of the
Lincoln Savings and Loan and an investment partner of his wife and
father-in-law. Aside from the ethics violations that McCain now wears as a
badge of honor to show he learned his lesson, failure to regulate was behind
the Savings and Loan crisis, the previous serious threat to the financial
system that required a multi-billion dollar taxpayer bailout. McCain seems to
have missed that lesson.
What McCain knows about economics he learned largely at the knee of Phil Gramm
(see With friends
like these ... , July 15), a former senator from Texas and now a
lobbyist for Swiss bank UBS carrying the lofty title of vice chairman. During
his days on Capitol Hill, Gramm was known as the senator from Enron (where his
wife Wendy Gramm sat on the board of directors) and co-authored legislation to
ditch the barriers between commercial and investment banks, a key deregulatory
step to enable the current crisis. Before he had to step down from the campaign
for calling America "a nation of whiners" that imaged a "mental recession",
Gramm wrote McCain's main economic plank of more tax breaks for those at the
top of pyramid and more deregulation. Nothing in his flood of flip-flops last
week indicated McCain has changed his mind on those policy cornerstones.
Need more proof that McCain can't put together the pieces of the financial
crisis into a coherent picture? He still favors social security privatization.
His website says he supports "supplementing the current social security system
with personal accounts". That's already possible to some extent through
individual retirement accounts (IRAs). But McCain and his aides, even last
week, insisted that he favors more comprehensive privatization of social
security as President George W Bush attempted in 2005.
Privatization along those lines would reduce guaranteed benefits, putting
retirees' base incomes at the mercy of financial market vagaries. It would also
undermine the basic premise of the social security program, which McCain has
criticized, that current workers pay their parents benefits in return for a
guarantee of benefits from the next generation of workers when they retire.
Perhaps most revealing of McCain's befuddlement, privatizing social security,
even partially, would provide a huge windfall and further leverage for those
evil Wall Street financiers he attacks for causing the crisis.
Bottom line: McCain either truly doesn't know what he's talking about on the
economy, or he's utterly hypocritical, saying whatever he and his advisors
think will sound good. Most likely, it's a scoop of both. Whatever the case,
it's frightening to think of him and his team taking the economic reins.
Former broadcast news producer Muhammad Cohen told America's story to the
world as a US diplomat and is author of Hong Kong On Air (www.hongkongonair.com),
a novel set during the 1997 handover about television news, love, betrayal,
high finance and cheap lingerie.