March 24, 2008
Monday

WASHINGTON -- The two lawyers and the Navy pilot running for president declared their candidacies during a long economic expansion. But today, they are seeking to lead the world's biggest economy as policymakers scramble to confront a financial meltdown that at times has more resembled events in Argentina or Indonesia than the United States.

Whether a crisis has been prevented or postponed, the historic magnitude of Wall Street's tumult is all but certain to burden the next president with heavy baggage.

The Federal Reserve's emergency actions last week may stave off catastrophe, but they also planted the seeds for inflation and a devalued dollar. Foreigners who financed the huge U.S. trade deficit for years now are trying to shed dollars.

Plans in Congress to guarantee up to $300 billion in mortgages and rule changes that would allow two big government-sponsored housing lenders to finance more mortgages increase taxpayer exposure. The days of using home equity like an ATM are over. So is easy corporate lending. The crisis is taking much longer to unwind -- and having much bigger aftershocks -- than most people expected.

The worst may not be over.

When the Fed intervened to prevent the collapse of investment bank Bear Stearns from crashing the entire financial system, Republican Sen. John McCain was visiting Iraq. He issued no statements in reaction to the upheaval.

Democratic Sen. Hillary Rodham Clinton leaped on the crisis, touting her phone calls to the head of the New York Federal Reserve Bank and Treasury secretary, saying, "3 a.m. calls can be about economic crises as well as national-security ones," while showcasing her plans for a mortgage interest-rate freeze and moratorium on home foreclosures.

Rival Sen. Barack Obama was rushing to avert his own meltdown after tapes of the Rev. Jeremiah Wright's incendiary remarks aired. Obama praised the Fed's interventions. "My philosophy on this is that intervening in bubbles that burst is not always helpful and can just delay the pain," he said. "On the other hand, I do think what you don't want is a cascading decline."

Economics has never been the main interest of any of these presidential candidates, though each has respected economic advisers.

"I know a lot less about economics than I do about military and foreign-policy issues," McCain, a former pilot who spent much of the Vietnam War in a prison camp, recently confessed. "I still need to be educated."

Clinton makes no such confession, but even some Democratic economists express horror at her plan for rescuing strapped homeowners. A five-year freeze on interest rates and a moratorium on foreclosures would essentially void millions of private contracts and almost surely raise rates for future homebuyers. It would also bail out speculators along with victims of fraudulent mortgage brokers.

"For people who bought second and third investment properties as a way to make money and now walk away, there doesn't seem to be any reason to help them any more than you would want to help people who bought Dow Jones index funds that have gone down," said Greg Rosston, deputy director of the Stanford Institute for Economic Policy Research and a former telecommunications economist in the Clinton administration.

University of California-Berkeley economist Barry Eichengreen, an expert in financial history and adviser to the International Monetary Fund during the Asian financial crisis of the late 1990s, cautions that fixing the enormous overhang of bad debt that began with mortgages but spread throughout the economy "is going to take replacing the capital, the equity, the resources in the financial system that's been destroyed. Foreign investors are no longer willing to do that, so there is not going to be more money coming from Abu Dhabi or Singapore or China to bail out the next hedge fund or investment bank to go bust. It's going to have to come from the taxpayer, and no one has really confronted that issue yet."

Many economists are comparing the current U.S. situation to Japan's long malaise after a 1990 real-estate bubble and crash that left banks saddled with bad debt that hung over the economy for years.

The Japanese central bank tried to fix the problem by lowering interest rates to zero, to no avail. Not knowing the real value of underlying assets, no one wanted to lend. The yen plummeted in value. Japan's powerhouse economy stagnated during a "lost decade" from 1992 to 2002, and growth since then has remained weak, relying on exports fueled by the weak currency. That growth is threatened again by the dollar's sharp decline against the yen.

SitNews ©2008
Stories In The News
Ketchikan, Alaska

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