Here is a great explanation of what is happening with the economy right now, followed by how McCain & his economic advisor, Phil 'We Have Become A Nation Of Whiners' Gramm, have contributed to it. Each of these excerpts have other links within the articles that you may also want to check out.
http://www.electoral-vote.com/evp2008/Pres/Maps/Sep15.htmlWall Street in Turmoil
The financial industry is reeling. The venerable Lehman Brothers investment bank has filed for bankruptcy. Insurance giant A.I.G. is close to bankruptcy, and Merrill Lynch only avoided bankruptcy by selling itself to Bank of America for $50 billion in BoA stock. Other financial firms are in the bullseye. This week has been the worst week for Wall St. since 1929.
For people who don't understand what is going on, here is the story in a nutshell. Decades ago, when you wanted to buy a house you went to local bank and applied for a mortgage. If the mortgage was less than three times your annual income and you had a good credit history, the bank would loan you the money and you would pay them interest and some principal every month for 30 years. Then Wall St. got a bright idea: buy up all the mortgages from the banks, collect a few thousand into a pool called a CDO (Collateralized Debt Obligation) and sell shares in it. The owner of each share would get a pro-rata share of the incoming monthly mortgage payments, analogous to what a bond owner gets.
What happened? It sounded like a great idea and soon all mortgages were sold and repackaged into shares. It didn't take long before the banks realized that they could issue mortgages of five, six, even eight times the buyer's annual income or sell them to people with terrible credit histories. After all, the shaky mortgages would soon be somebody else's headache. That's what happened. Lehman, Merrill, and others bought billions of dollars of mortgages that the homeowners had no hope of ever repaying on schedule and nobody wanted to buy shares in these worthless CDOs, so the brokers got stuck holding the bag with billions in worthless loans.
What are the political consequences of this meltdown? It is a bit early, but here's the expected pattern. Republicans will say that bankruptcies, however unfortunate, are an absolutely essential part of free markets. When managers make stupid decisions, the market punishes them by driving them into bankruptcy. This warns other managers not to be so greedy. Democrats will say that millions of innocent homeowners and small investors are going to lose their homes and life savings due to misbehavior on the part of rapacious and unscrupulous bankers and that it is the job of the government to regulate the entire financial sector to protect ordinary people who don't know the difference between a CD and a CDO.
One thing that is crystal clear already is that reporters are going to be asking the candidates how they plan to deal with this. John McCain might call for more regulation and when other Republicans scream at him use this to prove his "maverick" credentials. Of course he will be accused of locking the barn door after the prize horse (with or without lipstick) has escaped since he has never been much of a fan of government regulation before. For Obama it will be easier to call for more government oversight. Democrats believe government is supposed to protect people.
And here is the explanation of McCain & Gramm's involvement in the collapse of the financial industry.
http://www.electoral-vote.com/evp2008/Pres/Maps/Sep17.htmlGovernment Bails out A.I.G.
After several days of saying it would not bail out the nation's largest insurance company, A.I.G., the government bailed out A.I.G. risking $85 billion of the taxpayers' money. In return, the government got 80% of the now near-worthless stock. In other countries, when the government effectively buys (nearly) all of a company's stock, it is called nationalization. Who would have thought that the Bush-Cheney administration would go Marxist-Leninist in its waning hours? Treasury secretary Henry Paulson was clearly afraid A.I.G.'s demise would take out too many other big players and wreak massive damage on the economy. The move will be very controversial since it risks public money to protect bad investments made by A.I.G. management. The political fallout will be immense.
This nationalization poses an especially large challenge for John McCain, who is now railing against corporate greed and lack of government regulation of the financial industry. What he doesn't talk much about is how deregulation happened. It was the 1999 Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act and thus eliminated the depression-era walls between between banking, investment, and insurance that made this crisis possible. Glass-Stegall erected walls between banking, investment management, and insurance, so problems in one sector could not spill over into the others, which is precisely what is happening now. The primary author of the Gramm-Leach-Bliley Act was none other than McCain's economic advisor, former senator Phil Gramm (who thinks the country is in a "mental recession"). McCain fully supported the bill and has a decades-long track record of opposing government regulation of the financial industry. His new-found conversion to being a fan of regulation is going to be a tough sell as Obama is already pointing out that McCain got what he wanted (deregulation) and this is the consequence.
