The Economy and Other Winning Issues for the GOP

It is tempting to look back nostalgically on the post RNC Sarah Palin speech boomlet that lasted about two weeks when all the world was aglow with awe and excitement for the fresh faced Sarah, and the media and Obama campaign dour and pouting as the new starlet strode mightily upon the stage.  They seem now as the halcyion days, heady and encouraging times, with McCain pulling ahead of Obama nationwide and in key battleground states, and even coming within 3 percentage points in such blue states as New Jersey; yes, things were certainly looking up at the time. 

But, alas, the blue skies turned dark when the financial crisis landed on our heads some two weeks ago (and our heroine, Sarah, pre Biden debate, had not quite found her sea legs with the Gibson and Couric interviews), voters suddenly favored the Democrats, a curious phenomenon, given their generally anti-business, job destroying policies.  Perhaps, it is the siren song of the nanny state that drives such movements, the fear factor, the desire for some to seek shelter in the warm bosom of the government, however misguided such compulsions may be.  For, indeed, it is the overweening government that has brought us to the precipice of ruin in the first place, and, now, the costly bailout that will only make matters worse.  

And so, it seems that hope is lost, the country foolishly lining up with the side that actually owns the crisis, created it with its "affordable housing" initiatives, expanding its pet monster federal programs Fannie Mae and Freddie Mac to outrageous proportions, too big to fail (but fail they did, as was inevitable), together with policies that forced banks to modify their usual lending practices to pursue social engineering fantasies, specifically to move minorities and the "poor" into the ranks of homeowners, not, by my reading, a constitutional right or a government (taxpayer) obligation.  This, by the way, in a nutshell is the legitimate argument McCain should be making with every other word out of his mouth, but I have yet to hear it.  Perhaps, that will change.

But what are the arguments that McCain can make, indeed, winning arguments that can turn the tide in his favor in the remaining time before the election.  Whether he, or Republicans in general, realize that the current climate actually favors them is not known.  Based on McCain\'s running commentary on the campaign trail and the haplessness of the Republican leadership, it seems they do not. 

So, allow me then to take the opportunity to frame the argument and provide the reasons McCain and Republicans should be climbing all over the feckless and inadequate Obama and his leftist party, a Democrat Party, mind you, that does not own a novel idea to speak of, whose stock in trade consists (however they may want to parse it) of the same nostrums of higher taxes, increased spending, and government expansion.  Government as white knight, as savior, as all knowing, as Lord and Master.  There is not a problem or aspect or niche or recess of civic life that, by their lights, government should not place its warm, prying, probing hands into.  It is a vision of an all encompassing administrative state, with nary a person or project or pursuit untouched by the state; it is Welfarism, European style social democracy, collectivism, also known as socialism.  It is this titanic struggle we now find ourselves in, a struggle to redefine the character of the nation, a struggle to determine whether the nation should move itself in the direction of the social welfare nanny state (soft Totalitarianism) or worse or retain its unique American identity and character, its free markets, individualism, liberties, and traditional values (self reliance) and institutions (marriage, family, religion, etc) with powers and innovation and dynamism residing primarily with the people, its entrepreneurs and risk takers, and not the government. 

So what are the obvious issues: five simple ones, all of which favor McCain if he will grasp them.

First: The economy.  This is a winner for Republicans.  Yet, none of our elected Republicans seem to realize this.  Democrats have gotten away with blaming the current fiasco on "deregulation," which they interpret to mean Republicans and then "Bush," or Bush policies, which is completely fatuous.  (That everything is blamed on Bush is another matter, because of his overall unpopularity.  Running at a consistent job approval rating in the high twenties does carry significant downsides.  Bush has done more to ruin the Republican Party and its brand than anyone since Richard Nixon and beyond, about which I have written often in the past.  See previous articles and blogs on the subject.)  The housing bubble that recently burst and the mortgage/credit crisis that ensued was caused not by deregulation, not by Bush policies, but by Democrat government programs in place well before Bush ever took office: federal policies that sought to expand home ownership by minorities and the "poor," policies that required banks and mortgage companies to abandon standard lending practices to pursue the cosmic pipe dream of home ownership for everyone, even those who could not afford one, those who could not make a down payment, those who may not have even had a job, those who may have even already been receiving public checks.  It was, in other words, housing welfare: they get a house, we pay for it.  Impractical.  Absent common sense.  Ignorant of human nature.  Primed for corruption.  Doomed to fail and blow up in our faces.  Government writ large.  In a word: liberalism. 

Fannie Mae and Freddie Mac, Democrat play toys, are at the center of the crisis.  The two mortgage monstrosities control more than half of the mortgage market.  In 1970, Fannie and Freddie accounted for $15 billion in mortgage debt.  Since then, egged and prodded by our government, it has doubled its portfolio every year to the incredible sum of $5 trillion today, or more than a third of our GDP with more than half of the nation\'s mortgages tied up in this duopoly, an incredibly dangerous concentration of risk, power, and wealth.  With the implicit backing of the government, these "GSEs" (Government Sponsored Enterprises) were able to borrow at US treasury rates (backed as they were by the full faith and credit of the US Government), much lower than other banks, and had low regulatory capital requirements, enabling them to outcompete other companies.  With access to cheap credit and low capital requirements, Fannie and Freddie ballooned and came to dominate the mortgage market, controlling half of all mortgages in the country.  Because of the implicit backing of the government (taxpayer), they could play fast and loose with regulations and requirements that held other firms and companies to a tighter script.  Whereas other banks and firms may require one dollar in reserve for every ten dollars loaned, the ratio for Fannie and Freddie may have been thirty or forty to one.  This combined with low interest rates in general after 9/11 fed the housing bubble.  It also led to greater speculation with individuals owning one or two houses with the hope of selling them quickly for a profit.  With the push for greater homeownership, access to cheap credit, "innovative" mortgages with little or no down payments, low interest, interest only, or adjustable rate mortgages (ARMs) were used.  As long as prices continued to rise, everyone was fine including banks and Freddie and Fannie.  Once housing prices began to decline, unqualified buyers and speculators who were overleveraged to begin with saw the value of their property drop below the mortgage and defaulted on their loans leading to foreclosures.  With rising defaults, the two mortgage giants became insolvent, as did any number of other giants (Lehman Brothers, AIG, Bear Stearns, Country Wide, Merrill Lynch, etc.)  

How did Fanny and Freddie get so big?  And why did they and so many other banks and firms abandon normal underwriting standards?  Because the government told them to.  Some history first.  In 1934, during the Great Depression, the Federal Government created the Federal Housing Administration, which guaranteed mortgages from default to encourage banks to continue making loans.  The Federal National Mortgage Association (Fannie Mae) was created in 1938 to buy FHA mortgages.  In 1968, Fannie Mae was privatized.  In 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was created as a government agency to assist California overcome regulatory hurdles to obtaining mortgage loans.  In the 1970s, the Federal Government became concerned over possible mortgage discrimination.  In 1977, during the Carter Administration, Congress passed the Community Reinvestment Act (CRA), which obligated banks to service the entire geographic area in which they operated including poor and moderate income neighborhoods.  Congress had already passed the Home Mortgage Disclosure Act (HMDA) in 1975, which compelled lenders to give detailed figures regarding mortgage applications.  Each year, banks were given grades on "CRA compliance."  In 1991, HMDA statistics were expanded, which allowed for comparisons of rejection rates by race.  This would be followed by various reports and "exposes" by the media, activists, and news organizations over alleged racial discrimination.  There was little or no examination of relative creditworthiness between groups.  In 1989, Freddie was sold to private investors just as Fannie had been in 1968.  Freddie continued to grow and both GSEs held over 50% of all mortgage debt in the country by 2003. In 1992, the Congress created the Office of Federal Housing Enterprise Oversight to provide government oversight of Freddie and Fannie.  (much of the above information obtained from Arnold Kling, Cato Institute and Stan Liebowitz, WSJ)

There is more: In 1992, Congress pushed Freddie and Fannie to provide more and more loans to low and moderate income borrowers.  In 1996, the Department of Housing and Urban Development (HUD) mandated that Freddie and Fannie give 42% of their loans to borrowers with sub median income levels for a given area.  This target was increased to 50% in 2000 and 52% in 2005.  In 1996, HUD mandated that 12% of Freddie and Fannie mortgages had to go be "special affordable" loans to borrowers with income of less than 60% of the median for an area.  This was increased to 20% in 2000 and 22% in 2005.  The goal for 2008 was supposed to reach 28%.  Fannie and Freddie and other banks met these goals by abandoning standard underwriting practices: little or no down payment, teaser rates, low and adjustable rate mortgages, with little or no attention paid to the qualifications of the borrower.  The so called "sub prime" mortgage.  Fannie and Freddie were engaged to serve political purposes: to increase homeownership among the poor and minorities with little regard for the overall impact on the economy.  The political class could boast that they had helped the underclass to attain to the dream of owning their own home, in effect subsidizing low income housing outside the budget at least until it all collapsed.  CRA also played a role: First passed in 1977, by 1995 it had been further enhanced so that loans to lower income families were increased by 80%.  Federal policies pressured banks to offer loans to high risk borrowers so that they could strut and self congratulate all that they had done to help the underclass.  It pushed for greater home ownership and urban development without having to contribute budgetary money, a free lunch, until the workings of the market decided otherwise. The Federal Reserve also played a role: in 2003, federal loan rates hit a 40 year low.  Money was cheap.  This, together with the abandonment of standard lending practices and the push to increase homeownership among the poor and minorities, created the housing bubble.  It was not a speculative bubble but a bubble created by government policies and low interest rates from the Fed.  Between 1997 and 2005, demand for housing increased dramatically as did housing prices.  Without this government prompted bubble, there never would have been a subprime mortgage crisis to begin with.  Without Freddie and Fannie\'s role in buying up risky loans to unqualified borrowers, bundling and selling them to misguided investors around the country and the world, backed by the implicit guarantee of the Federal Government,which turned out to be needed after all, the housing boom and bust, the sub prime mortgage crisis would never have occured.  Yes, there was a role played by greedy investors and by greedy borrowers, but the primary role was government policies and the Government Sponsored Enterprises,  Freddie and Fannie (some of above from Russel Roberts writing for WSJ).

Other CRA missteps and criticisms: 1993: Clinton asked CRA regulators to reduce paperwork and reward performance, which meant make it easier to get loans.  So called "redlining" had to be reduced so anyone regardless of where they lived (and whether they could afford it) should be able to get a loan.  This made it easier for community groups and activists to complain when banks did not comply with CRA obligations.  1995: New CRA regulations allowed lenders subject to CRA to calim connumity development loan credits for loans given for redevelopment of industrial sites as part of effort to revitalize poorer neighborhoods.  In 1998, the share of loans going out to lower income borrowers increased from25% in 1993 to 28% in 1998.  1999: Gramm-Leach-Bliley Act, also known as Financial Services Modernization Act, which repealed the part of the Glass-Steagall Act of 1933, which prohibited a bank from providing full range of banking services, including investment, commercial, and insurance.  As part of the deal, Gramm,who had opposed it unless more banks would be excluded CRA requirements.  A compromise was reached whereby CRA would cover bank expansions into the various new services offered, but smaller banks would be reviewed less frequently for CRA.  Overall, there would be more CRA compliance of banks.  Clinton signed it along with 38 Democrat Senators claiming it would expand the powers of banks while expanding the reach of CRA.

There is  yet another government misstep that is all to often overlooked and that is the role of the Sarbanes-Oxley regulations that came in the wake of Enron in 2002.  The new accounting rules required that financial services companies "mark" or value their assets based on current market value, which may sound reasonable enough on the surface, but in the face of a credit crisis results in marking down assets at firesale, liquidation levels, sort of like assessing the value of a home in the middle of a hurricane or earth quake.  At that moment, the value of a home may be about zero since no one is likely to want to buy a home at that particular moment, yet a week or so later, it may be a different story.  Mortgage companies in the midst of the credit crisis were forced to mark down their assets sharply, far more than they would have in a more normal market (perhaps the value should be set at a rolling three year average), which set off a chain reaction that led to worsening stock prices, reduced credit ratings, requiring the firms to put aside greater and greater reserves (dictated by banking regulations) to cover the losses, hence the credit crisis.  Yet another government policy.

And who opposed this unfolding calamity in the immediated past when much of the damage could have been avoided?  In 2003, then Federal Reserve Chairman, Alan Greenspan, called for stricter regulations of Freddie and Fannie and limits on the growth of their profitable but risky portfolios, in the aftermath of the accounting scandal for the GSEs at the time.  But he was opposed by many in Congress, especially Democrats, very enamored of their "affordable housing" initiatives.  In 2005, the Senate Banking Committee, under Repubican control at the time, attempted to reform the GSEs by setting capital requirements the same as other lenders, prohibeted them from holding portfolios, and gave their regulator greater authority and oversight over them.  Blocked by Dems.  All voted against it.  Never made it out of committee.  McCain by the way, supported the legislation from the floor of the Senate.  Obama and other Dems remained silent.  In retrospect, this was probably the single most important piece of legislation of the year. Fannie and Freddie themselves, awash with incredible wealth before the inevitable collapse, spent more than $10 million in lobbying over the last ten years.  They acquired the services of well connected Washington insiders as executives and provided them with multimillion dollar contracts.  Many affordable housing advocates in Congress, including Barney Frank, Chris Dodd, and Chuck Schumer (and Barack Obama) are among the largest recipients of GSE political contributions.  They didn\'t limit their influence peddling to members of Congress but to various charities and advocacy groups that could then influence their representatives.  When opponents (usually Republicans and Conservatives) would raise questions about the operations of the GSEs, they would be quickly confronted by smears and attacks, including not infrequently, playing the ever reliable race card.  They would also be accused of wanting to raise mortgages rates on the poor or depriving them of the right to own a home and recieve angry calls and letters from constituents.  They have used their incredible lobbying pressure and influence peddling to intimidate detractors and critics, while encouraging their congressional enablers.  Basically, well healed thugs, intimidating opponents in any number of ways through their great weath and lobbying.  There is no way that the business model of private profit and public or socialized risk is viable, yet survive it has through the strong arm lobbying tactics of the two GSE behemoths.

{(Other points not fully developed): put in that none of this had to be, over concentration of risk in two companies.  prvt profit and public risk.  lobbying of f and f.  go through cra, clinton, carter, warnings by mccain, bush, repubs.  blocked by dems. nothing to do with dereg.  check articles.}

It was, in a word, housing welfare, or, to put it another way, liberalism.  They get a house, we pay for it.  That, coupled with low interest rates by the Federal Reserve after 9/11, which created over liquidity, basically cheap money, led to the latest boom and bust cycle.  And, yes, bad lenders and bad borrowers.  Little to do with "deregulation." 

And yet, Republicans just take Democrat attacks on the chin and just grin and smile and then try to move on to something else; rather than eagerly take the issue head on, which they should because with concise explanation, it is actually a winner.  They\'ll sheepishly say something to the effect that McCain is not Bush and switch to talking about his plans in a McCain administration, which is fine, but why let them get away with what is demonstrably false and furthermore an evasion of a calamity that is primarily their responsibility . 

And Republicans take this.  Or they blame "Bush" policies.  But Bush has nothing to do with the credit crisis.  Democrats do.  Fannie Mae and Freddie Mac are Democrat projects.  They are at the heart of mortgage debacle.  They control over half of all mortgages  in the country with nearly six trillion dollars in assets, pushing "affordable housing," compromising lending practices, forcing banks to provide subprime loans to unworthy borrowers, controlling Congress through donations, the largest recipients of which have been Democrats.  They bundled together mortgages and sold them to investors, many of which were high risk loans that eventually defaulted, but in so doing creating a systemic crisis.  Obama is the second leading recipient of Fannie Mae Freddie Mac donations.  Democrats are responsible for the current Mortgage crisis.  All  roads lead to Fannie and Freddie.  Democrat programs to provide housing for minorities and the poor, Democrat constituencies.  Corrupting standard lending practices, defaults, foreclosures, a collapse of the financial system, recession and possibly a depression.  McCain should properly point the finger of blame at the Democrats for the current economic crisis.  And how about a free market novel idea: cut capital gains to zero for three years.  See what that will do for the economy.  And cut top federal tax rates to 25%.  How\'s that instead of a $700 billion bailout.  Mainly, tie the current financial crisis around the neck of the Democrats.  More failed liberalism at work.

Two: Energy independence.  This ties in with the economic crisis.  Democrats talk about wind and solar.  This is laughable.  Republicans are strong on this.  This is their issue.  Drill now, drill here.  Nuclear.  Shale.  Clean Coal.  Flex Fuel.  Alternative Fuels.  It is a national security issue as well.  It is a winning issue for McCain to hit Obama and the Dems hard on this, because they are weak on this, beholden to radical ecomarixists as they are.  It is an easy argument to make, Americans will understand how dangerous it is both in terms of national defense and economic security to continue sending $700 billion overseas to nations that do not like us.

Three: National Security.  Obama will weaken our military.  He and the Democrats have done everything they can to undermine our fighting forces and our effort in Iraq.  They are invested in defeat.  They are weak on surveillance and necessary measures to protect the homeland.  Obama and the Democrats cannot be trusted to protect the nation.

Four: Personal Character.  Still a big winner and issue for McCain.  There are many question marks about Obama, very few of which, by the way, have been explored by the media who, of course, are in bed with him.  His radical associations are well known and raise legitimate questions about who he is.  He spent twenty years sitting in the pews, listening to his racist anti American pastor, Jeremiah Wright.  He was closely involved with terrorists Bill Ayers and Bernadette Dorn.  There is the radical group that he has been closely involved with,  ACORN.  There is his mentor, the radical socialist, Saul Alinsky, when he was a "community acitivist."  And then there is corrupt business man Tony Rezko.  Basically, Obama is a leftist, smoothed over for purposes of a general election.  He is also a standard elitist who looks down on the "bitter clingers."  McCain should question his prior associations and his overall character.  The reality is that Obama is a deeply flawed candidate, whom even in a Democrat year, the Republicans should handily defeat.

Fifth: And most controversial perhaps for a Republican.  McCain must throw Bush under the bus.  His policies have been ruinous for his party and his country.  He performed miserably in Iraq until finally settling on Petraeus and the surge, but by then the entire project had been discredited.  He did not rebuild the military after the Clinton underfunding.  He expanded government.  Created new unfunded entitlements.  Was miserable on immigration (here, McCain is no better).  Worst, he has been a profligate spender.  Thoroughly ruined the Republican name brand for fiscal responsibility.  He has done nothing to ensure energy independence, especially when he could have in his first six year with a Republican Congress, which he has squandered with his recklessness.  The recent turn for Obama with the economic crisis is because of Bush.  It reminds people of Bush whom most despise.  They blame Bush rightfully or wrongfully for the economy because he is so unpopular in general.  If he was respected and loved, the sinking economy would not necessarily accrue to  him.  The entire election is in fact a referendum on Bush.   Dems continue trying to tie McCain to Bush, to discredit him.  It is time to discard the man who has done so much to ruin his party, in order to save it.

 McCain can still win this.  These are the five big issues in the remaining weeks.