Two fuses were lit this past week that could eventually explode later in John McCain's campaign -- a housing-banking crisis exposing Republican anti-regulation orthodoxy and the senator's penchant for falsehoods that gives new meaning to Bush III.
First, the modern anti-regulation crusade began officially in 1978 with enactment of Prop-13 in California limiting property taxes and the defeat of the federal Consumer Protection Agency in Congress as "more big government." And then of course Reagan rode this deregulatory movement -- "Government is not the solution... Government is the problem" -- to the White House two years later.
Now cut to 1995 when two events combined to start a counteraction: Speaker Newt Gingrich's unpopular shut-down of the federal government during a budget battle with President Clinton and the attack in Oklahoma City by domestic terrorists who killed people precisely because they were federal workers. Responded Clinton, "I'll never criticize 'bureaucrats' again."
Now in 2008, the surge in home foreclosures and decline of home equity is freshly reminding people about the results of deregulation. As House Financial Securities Chairman Barney Frank discusses below, regulation is no longer a four letter word and the Republican mantra of free markets doesn't look so hot for the millions whose mortgages exceed the value of their homes.
Who's to blame? As Frank explains, it was Ayn Rand disciple and Fed Chairman Alan Greenspan who was asleep at the switch. And Paul Krugman quotes an irate driver shouting at the line forming at the failed IndyMac bank, "Bush economics didn't work. They are right-wing Republican thieves." The crowd reportedly cheered.
Especially when combined with Enron, E. Coli, Katrina, imported Chinese toys, global warming and the like, it should not be difficult for Barack Obama to do a Reverse Reagan and say, "Deregulation is not the solution...Deregulation is the problem.: Or, if he's feeling frisky, "laissez isn't fair."
Second, there's what Stephan Colbert mocked as "truthiness", W's habit of misstating almost everything because "truth has a liberal bias." McCain's problem is that he's a 19th century warrior in a 21st century world and so has to resort to building a bridge of falsehoods to connect his unpopular positions and the voting public.
Last week, for example, in his response to Obama's Iraq speech, he said that he would not "bluster" and then declaimed that "I know how to win wars!" and "I will find bin Laden," and later, "we're not succeeding, we have succeeded!" (What wars has he "won"? Does he know more about bin Laden's whereabouts than the Pentagon? If our venture in Iraq has succeeded, what would defeat look like?) Before that, he repeatedly asserted that Obama would increase taxes on those earning under $250,000 annually when Obama's plans would not.
By repeating simple but false statements, he apparently believes that he can convince so-called low-information voters who won't read Obama's careful analysis of the Middle East. Here he's truly McBush, in the sense of how W routinely reversed normal logical thinking -- instead of facts leading to conclusions, conclusions lead to "facts."
Which presents a challenge to the national media. Whatever credibility McCain had as a POW hero and the charming maverick of 2000 should now give way to an earned skepticism based on his niagara of falsehoods. Newspapers and even TV stations should start running Fact Check boxes, like the Washington Post's terrific periodic "Pinnochio" columns that objectively dissect candidates' misstatements.
Then by the Fall, the Republican rhetoric on deregulation and the economy and McCain's strategic dissembling will make the mountain he has to climb even steeper.
EXCERPTS FROM AIR AMERICA'S 7 DAYS, JULY 19, w/ FRANK AND HUFFINGTON, CONASON & GREEN
GREEN Q: Is the mortgage-housing-banking crisis just the story of an economic bubble that's bursting, which happens every so often, or has this Administration's actions or inactions helped create this crisis?
FRANK: "Oh it's absolutely what you just said...Here is the fundamental point. Until maybe twenty years ago most mortgage loans were made by a regulated bank or credit union -- you got the loan from that entity and you paid them back. Then the financial geniuses came up with securitization. Now that has a lot of advantages because it can make your money move quicker. But basically what it says is, 'I will lend you the money, but I will than sell the right to collect from you to other people. And since I no longer am dependent on your repayment because I already made my money by selling your loan, it turns out people are less careful about it.'
It's really been a test of regulation...and conscious decision brought by Alan Greenspan, who is the arch de-regulator. Because in 1994, not coincidently the last time the Democrats had a congressional majority before this year, a bill was passed that was called the Home Owner Equity Protection Act, that said to the Federal Reserve, 'Look, we know have loans being made by non-regulated entities so please pass some rules. We give you the statutory authority to pass the rules to contain their activity and make it more responsible'. Alan Greenspan said, 'oh no, that's interfering with the market, I can't do that.' He didn't do it; that's where the crisis came. Fed Chair Ben Bernanke, to his credit, on Monday of this week finally used that authority, but if Greenspan had done 10 years ago what Bernanke did on Monday, we wouldn't be in nearly as bad as a situation."
GREEN Q: What do you expect will happen this week on the Treasury Department's proposal to extend credit to Freddie Mac and Fanny Mae to give confidence to investors and avoid the precipice of bankruptcy?
FRANK: "I hope will happen is that we will give the Treasury some authority to act, but it won't be necessary because it's one of these situations where it's more of a confidence issue. At the same time, however, in the same bill we'll do what some of us have been trying to do for a while, which is to greatly increase the regulatory supervision over Fannie Mae and Freddie Mac... We are going to give a regulator power over Freddie Mac and Fannie Mae the way regulators have powers over banks."
GREEN Q: But if a guarantee or even money is coming from taxpayers, shouldn't the government be paid back before shareholders?
FRANK: If the federal government does extend some money because we think there is a mortgage market crisis, then they have to make sure they pay us back." GREEN: What happens if the Bush administration objects to placing conditions on the authority to provide guarantees or loan? FRANK: "We're going to pass this. Then they're going to have the choice of either signing it or vetoing it. There's another piece to it: we've got a lot of problems out in the communities because there is property that's been foreclosed that used to pay taxes and now eats taxes, because it becomes a real problems for the cities. We're going to put into this bill $4 billion to be distributed to the cities, based on where there's been a lot of foreclosed property, so they can buy it up, get it back on the rolls, make it available for affordable housing or city employees.... The President said that's veto bait. We're going to frankly challenge him on it. I think in the end he won't veto it."
GREEN Q: In the historic tug-of-rope between free market Republicans and pro-regulation Democrats, could this be a moment that exposes the emptiness of free-market Republicans and boosts the arguments of pro-regulation Democrats?
FRANK: "You're absolutely right; it is almost comparable to the Depression. Look, a few years ago, a Republican appointee to the Securities Exchange Commission, Bill Donaldson, ordered hedge funds to simply register with the SEC. What a commotion! Oh, this was the end of the Earth! And the industry was actually able, in court, to overturn the order. The new SEC chair said 'Well, we're not going to do that again.'
When I became Chairman a year and a half ago, it was 'you better deregulate or we're all going to Europe.' Last week, Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke, two Bush appointees, came before the committee I chair and said 'you know what, we better charter those hedge funds.' There is now a consensus that we have to give the Federal Reserve a great deal more authority over investment banks and hedge funds. So yes, this is a recession caused by structural problems that are the result of inadequate regulation. First, they allowed a lot of mortgage loans to be made that shouldn't have been made. Second, they allowed these various financial institutions that are unsupervised to sell each other these mortgage loans so that the poison was spread throughout the financial system."
GREEN Q: Isn't the Fed in a quandary whether to raise interest rates to slow inflation or lower them to spur growth - are we getting dangerously close to a new stagflation?
FRANK: "In Europe, when you raise interest rates and slow down the economy, there's a social safety net. Nobody loses his or her healthcare. There's a decent unemployment situation. People don't have to drop out of school. And the problem we have in America is there is no good safety net. So the social consequences of slowing do wn the economy to deal with inflation are much harsher here than they are in Europe. That's the point I made to Bernanke. If the business community wants a Fed that's flexible enough to be able to deal with this, then they have to collaborate in having a safety net, so that the social consequences of that won't be so disastrous."
GREEN Q: Legalization of same-sex marriages began in your Massachusetts. How worried are you that the November referendum in the super-state of California will set the course of this issue for years to come?
FRANK: "You know, if that referendum were going to be a year from November, I'd be confident it was going to win. What we've seen with same-sex marriage or other anti-discrimination measures is that some people are nervous about them until they happen, and then they get used to them pretty quick. I am cautiously optimistic about California, but it's an effort that people really have to support.... In Massachusetts, after four years of same-sex marriages, it's become a very boring issue, except to the people who are in same-sex marriages (and probably life being what it is, maybe to a few of them)." GREEN: Has there been a flood of straight couples getting divorced because the sanctity of marriage was violated by same sex couples? FRANK: "No, our divorce rate continues to be very low. Frankly, if you're a straight person in Massachusetts, this has had no impact on you, unless you live next door to a couple of lesbians and you'd have to buy them a present."
GREEN Q: What's better, being widely regarded the wittiest Congressman, or the influential one in the middle of this huge policy discussion?
FRANK: "Well, this is more rewarding, in the sense that this is why I got into public policy. Along with responding to the crisis, we're enacting into law some of the major goals of low-income housing advocates, for housing trust funds and for improving the way that housing programs work together. That is much more satisfying in the deep sense. But it's a hell of a lot of work, and I used to have more fun." GREEN: Well, ideally you can be both funny and influential.
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GREEN Q: Arianna, as the only one of us with a masters in economics, what's your view of the desirability of the federal government to intervene to rescue Freddy Mac and Fannie Mae because, underwriting half the $12 trillion in home mortgages in this country, they're "too big to fail"?
HUFFINGTON: "This is really a big philosophical discussion we should be having in the country, because it has everything to do with what we think about the free market. Barney was willing to basically provide support for big gigantic companies because otherwise, the argument goes, the whole country would suffer if we don't. But we see that again and again, not just for institutions like Freddie Mac, but also with Bear Stearns, also with IndyMac. At what point do you step in and provide tax-payer resources, even though it's the banks that have taken the risk and many have profited along the way? Many who shorted Bear Stearns, for example, have been profiting, or who shorted IndyMac. And it's kind of interesting how, all that bleeding heart compassion and big government programs that the right objects to when it comes to individuals, they are very very glad to give when it comes to big institutions."
GREEN Q: I called it lemon socialism 30 years ago. But how far does it go -- while these mortgage firms are federally chartered though privately owned, should such a bail-out occur for, say, a GM if it keeps going south? This week that socialist McCain said maybe.
CONASON: "Well, first of all, in many of these cases, the government has had a tremendous role in them from the very beginning. GM, for example, is a diversified company that relies on its access to credit through the federal government, through GMAC; it has depended on defense contracts, and for that matter, on the US government building highways and subsidizing the oil industry. So you know, there's a false line, or at least a blurry line here."
GREEN Q: Is the economy so awful and Bush-McCain so identified with its problems that it's politically enough for Obama to say or imply that they screwed it up and we need a new team to fix it?
CONASON: "I think he starts out in a very good position, but there does have to be a program. There does have to be an explanation of what he would do, what the Democrats propose to do in order to get the economy growing again, and get it growing in the right way. Be cause I think a lot of people feel very skeptical right now, almost despairing about what anyone can do. You know, the ratings of the Democratic Congress are not that high right now, either. So the idea that, well, 'we're not the m, and that's all we have to say,' is wrong."
GREEN Q: In the back-and-forth this past week on Iraq, Obama gave a very convincing, penetrating, logical speech while McCain just repeated pet, pat phrases about "We've won!" and "I know how to win wars!" Are you worried that Obama's high-minded analysis could politically lose out to McCain's repeated bluntness?
HUFFINGTON: "Unfortunately, yes, unless Obama is much stronger than he has been on these issues. I mean, like right now, he should be making it very clear that on issue after issue, McCain has been adopting his positions. On Afghanistan, McCain's basically come around to saying we need more tro ops there. On Iran, he basically had to stand by while the US State Department is sending representatives in talks on its nuclear program, talks which he had condemned. So I think Obama needs to be underlining all those points, because the media are not going to do it for him. The media are still letting McCain get away with so much. I mean, just look at the week McCain has had; just imagine if it had been Obama who had screwed up with Czechoslovakia, or flip-flopped on gay adoption, or any of the other things that John McCain and the McCain campaign did. Imagine if Michele Obama had said that you need a small plane to go around Arizona!"