McCain's Fak-o-nomics - Fake Solutions for Real Problems

After the startling bailout of AIG last night, and the current day market's 200-300 point drop in response, Senator McCain (finally) has something to say about the economy.

"These actions stem from failed regulation, reckless management, and a casino culture on Wall Street that has crippled one of the most important companies in America," McCain said in a statement.

"We must not bailout the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act," he said.

It's too bad that what Senator McCain is saying makes absolutely no sense.

(1) Failed regulation: Really?  Failed regulation is the reason for AIG's fate?  If McCain bothered to read the business rags, or even just the business section of any newspaper, he would quickly figure out that AIG is, for the most part, a well run and profitable company.

"A.I.G.’s general insurance business, which accounted for nearly half its $110 billion in revenue last year, has held up well.

A.I.G.’s asset management group — it includes a private banking subsidiary for the wealthy, a broker dealer and another unit that manages mutual funds — has had losses, but it is not a unit that pushed the company to the brink. That group reported its first loss in years in the last quarter of 2007; in the second quarter of this year, it reported an operating loss of $314 million, which is modest these days.

Then there is the aircraft leasing business, which owns more than 900 planes and is part of the company’s financial services group. That unit is profitable, according to the most recent report for the quarter ended June 30."

Guess what, Senator McCain.  Insurance and investment management?  They're regulated industries.  And they're fine.

A.I.G.’s problems rest in the company’s London-based financial products unit, part of its financial services group, which is exposed to securities tied to the value of home loans. The financial products group sold credit-default swaps, complex financial contracts allowing buyers to insure securities backed by mortgages.

Oh, wait, you mean the complex derivatives and credit default swaps that are completely UNREGULATED, and are not even required to go through a CENTRAL CLEARINGHOUSE?  How exactly did regulation fail, when there was no regulation to begin with?

(2) Speculators who created this mess.  Senator McCain just LOVES TO HATE those sneaky speculators, they hide all over the place, just waiting for the right moment to jump out and wreak havoc on the American economy.  But speculators are like the WMDs were for Bush: completely fictional and nothing but an effective political tool.

But you know what the Republicans say: fool me once, shame on -- shame on you.  Fool me - you can't get fooled again.

The problem that has caused Bear, Lehman, and now AIG to fall is the very opposite of speculation (defined as the willingness to assume huge risks of loss, in return for the uncertain possibility of even greater rewards).  It was in fact the belief that through human ingenuity (or rather, banker ingenuity) the i-banks had created a method to remove risk from the world altogether.  Mortgage Backed Securities, the securities that started this whole mess?  It's concept was that if you take a bunch of bad risk loans, put them together, and then chop them up, that some portion (the "AAA" tranches) must be risk free. 

And then whatever risks were left were theoretically traded away through the credit default swaps, which are basically guarantees that one company gives to another if one of those risk-free MBSs actually fails (defaults).

Once the bankers convinced themselves that they had created the perfect risk-free products, they were free to go out and effectively give away money (oh yeah, that would be the money that belongs to you and me, average joe American) through increasingly risky loans, on the idea that these too, could be made risk-free.  And by collecting fees every step of the way, lots of bankers (and mortgage originators) got very very wealthy.

(3) Management's failure to act.  Really?  Act in what way?  Management can be blamed for having the hubris of believing that they had created a risk-free world.  They can be blamed for unreasonably leveraging up their companies to a point where the slightest shock could unravel the system.  They can be blamed for paying extraordinary rewards to those that generated pretend profits.

But Management, as much as I'm loathed to say it, were powerless once the economic tides turned against them.  Liquidity has been and continues to be the problem.  These banks hold trillions of dollars with of toxic securities on their balance sheets, securities that keep falling in value, but nobody wants to buy.

If McCain had said that American regulators, specifically the Treasury department and the Fed, have done nothing in the interim to set up a mechanism for the orderly dissolution of large, interconnected, international financial companies, I would have given him a pass.  Instead, he blames management for not taking actions that they have no power to take.

Senator McCain.  Stop talking in easy platitudes.  You have reverted to the Republican fantasy land where regulation and speculators are the evils that shall not be named... some maverick you are.  Unfortunately for you, they have NOTHING to do with the carnage on Wall Street that we are seeing. 

You are not the person who can fix this problem.  You can't even understand this problem.  And worse, by choosing a vice-presidential candidate who might actually have even less knowledge of the economy than you do (and honestly, until it happened, I had no idea that was possible), you have shown a complete lack of judgment and a complete disregard for the real problems facing this country. 

Kady blogs at Wonkess.

Comments

[Jill]

It's interesting that he's focusins on regulation today, when Palin was all regulation this, regulation that yesterday. We've found their talking point. It's just too bad it doesn't make a lick of sense.

[cynematic]

What's scary is that those in the know are not the same people advising him. Or they wouldn't tell him to say absolute nonsense.

I googled to see who McCain's economic advisors were. The results weren't promising: Gramm, Fiorina, and Douglas Holtz-Eakin.

http://mccainsource.com/economy?id=0002

The list was slightly longer at the Economists for Obama blog:
http://econ4obama.blogspot.com/2008/06/other-list-mccains-economists.html

But I notice that while many of the economic advisors on McCain's list are very wealthy, they don't necessarily understand the ins and outs of exotic financial instruments. Good businessmen (or women) are not the same as financiers and i-bankers.

Here's the list of Obama's economic advisors for comparison purposes: http://econ4obama.blogspot.com/2008/06/obama-economic-advisors-and-economic.html

[Donna]

Thanks for once again framing the background of the mess in terms we can all understand.