As the presidential campaign heats up, the candidates are sure to intensify their differences on national security, the Iraq war and tax relief for the middle class, and they’ll no doubt tear into each other’s positions during the coming debates. But based on the contest so far, don’t look for either Sen. Barack Obama or Sen. John McCain to take on the biggest, most troublesome economic problem facing many American families and financial institutions — the credit crunch.
Like the budget deficit and rising Medicare costs, the credit crunch seems to be well on its way to earning the honor of the Issue Candidates Want to Ignore.
To begin with, it’s complicated to explain, and the vagaries of the secondary market don’t exactly engage a crowd’s attention. That complexity also makes it easy for candidates to trip up on the details, as Alaska Gov. Sarah Palin, the Republican vice presidential nominee, learned recently, when she said Fannie Mae and Freddie Mac were too expensive to the taxpayers. (Both are private companies, and their takeover by the government hasn’t cost taxpayers anything — yet.)
Beyond that problem, it’s proving difficult, if not impossible, to find a solution to the mess. Because so many sides played a part in the mortgage meltdown, any ideas to fix it carry the potential of ticking off some important constituency.
The government’s seizure of Fannie Mae and Freddie Mac should have opened the door to making the credit crunch a campaign issue. But even the biggest financial bailout in U.S. history hasn’t taken over the election cycle.
Both sides issued statements supporting Treasury Secretary Henry Paulson Jr.’s moves. McCain, the Republican presidential nominee, along with Palin, wrote a Wall Street Journal op-ed piece vowing to reform the two agencies.
But neither side is digging into the details and talking on the stump about the estimated costs to taxpayers from the bailout; the reasons why the companies got into trouble in the first place, and possible solutions to the precarious state of the country’s mortgage markets.
“Politicians don’t like to talk about things that are contentious and that get people upset,” said Allan Meltzer, a professor of political economy at Carnegie Mellon University’s Tepper School of Business and a leading expert on monetary policy. “I find it disappointing, but not surprising, that they’re not speaking to this more.”
That could change — especially if the public begins to question the candidates during debates and public appearances, forcing the issue.
Meltzer said he wouldn’t be surprised to see that happen. “People are not stupid,” he said. “A lot of people understand they’ve been handed a big slice of debt they’ll have to repay. They know they’ve been given a huge liability. The candidates may have a harder time avoiding this as it goes on.”
The Treasury Department announced Sunday it would seize the companies, to avoid the possibility of both going into bankruptcy and threatening the stability of the entire housing market. Fannie and Freddie, which were both created by Congress, account for half the county’s mortgage debt. Both have been hit hard by losses on subprime mortgages, and more recently, higher-risk loans to borrowers with good credit.
The troubles at Fannie Mae and Freddie Mac are part of a larger mortgage collapse that has contributed to 11 bank failures so far this year, and a rising number of families in foreclosure — a record four million Americans, according to the Mortgage Bankers Association. To deal with losses, banks and lenders are tightening credit and making loans harder to get and more expensive for homeowners and for businesses — holding back economic growth.
The bailout is intended to get credit flowing again, with the government buying mortgage-backed securities held by the two agencies. The Treasury Department has declined to estimate the total cost, saying it will depend on the extent of declines in the mortgage market.
To William Poole, the former president of the St. Louis Federal Reserve and a longtime critic of Fannie Mae and Freddie Mac, the candidates don’t want to get too far into this issue for a reason. The potential cost of the bailout could be huge, and people may soon begin figuring out exactly what it might cost them.
In Poole’s view, the bailout could wind up with a tab as high as $300 billion, or $1,000 for every man, woman and child in the country. That should be enough to get people’s attention, he said. So might figuring out who to blame for the mess, with suspects on both sides failing to rein in the mortgage giants as the firms lobbied Congress during the past decade. Poole, however, is not optimistic the candidates will take the bait.
“It would be helpful if we had some sort of discussion of how we got into this situation,” Poole said. “There’s going to be, I believe, a very large taxpayer cost. But it’s the kind of topic that’s extremely difficult for politicians to get their arms around. I would not expect a rousing campaign speech anytime soon.”
On the Internet, housing and financial bloggers are losing their patience with the avoidance of the credit crisis in the campaign.
From Peter Viles at L.A. Land, the real-estate blog at The Los Angeles Times:
They gave nice speeches, inspired their conventions and hit the road. What they didn’t do — neither John McCain nor Barack Obama — was dare to say how they will solve the most serious economic problem facing the country: the deepening credit crunch. They didn’t even dare to mention it.
It is bad out there and getting worse: banks are in trouble and are unable to raise capital. The current Federal Reserve, and the Bush administration, have already taken unprecedented steps to back up and prop up the nation’s financial system. And yet the crunch deepens…Detroit wants a $50 billion bailout. What would they do, Obama and McCain?
Lou Barnes, a mortgage broker and blogger, said the bailout raises the kind of questions politicians may have to answer, even if they don’t want to:
If we save rich financial guys, what of Ford, Chrysler, and GM, and their retirees? What of the impulse to save homeowners, no matter how foolish, no matter how terribly unfair to the prudent but unlucky? Not one of the four nominees has financial-market experience or evident knowledge. Better not to talk. However, election-cycle paralysis may be overtaken by events.
Maybe. But for now, both Obama and McCain are taking the strategy of offering sympathy to people losing their homes in foreclosure. Or making an issue of McCain’s houses. Or arguing over which side really represents change.
To Dean Baker, co-director of the Center for Economic and Policy Research, something far more dramatic than the unprecedented takeover of Fannie and Freddie would have to occur to prod either side to put the credit crunch front and center in the campaign.
“I don’t think they are going to talk about it,” Baker said. “The Republicans don’t have much to say, and it’s not high on their agenda. The Democrats aren’t much different. Obama’s taken a lot of money from Wall Street, and the Republicans are tied to those people too. There’s just a real reticence to get into this.”
It’s still early in the campaign, though, and it’s possible that one of the candidates may decide to elevate the credit crunch into a major issue.
Until that happens, even their critics acknowledge the candidates have pulled off something pretty impressive so far. They’ve managed the rhetorical feat of talking in generalities about jobs, housing and the economy — while dancing around the credit crunch at the heart of the problem.