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Tuesday, September 16, 2008

The Economic Debate: If I Were McCain's Political Advisor

McCain made a gaffe yesterday when he said that the fundamentals of the economy of America are sound. Now, Obama immediately pounced on this immediately...

Now, the whole day today McCain has been on the defensive trying to straddle the line between defending the notion that the economy is fundamentally sound and also presenting himself as the one fit to reform the system. Of course, there is a natural dichotomy between this notion and it is a losing argument from the beginning. Frankly, I wish that McCain showed the same kind of political courage on economic matters that he shows on foreign policy matters. He had just such an opportunity on mortgage issue and blew it. Initially, he took the approach that the mortgage crisis occurred because of irresponsibility and that the market should shake itself out. Then, Obama attacked him for a few days for not caring about poor folks, and immediately McCain started parrotting Obama's bailout lines.

McCain had the right position and a defendable position, but what he needed to do is defend it. Here is how I would have approached the economic issue in light of the news from Wall Street

1) The fundamentals of the economy are strong.

Everything that Barack Obama's advertisement says is absolutely true. We have lost 650,000 jobs this year. Banks and real estate firms are in a state of crisis. We do have dramatically higher foreclosures. And yet, our unemployment is at 6.1%. That's not outstanding, but it is not a crisis either. The last Gross Domestic Product index grew at 3.1% in the most previous quarter, and the crisis on banks and real estate have not spilled into any other industries. At the end of the 1980's Japan was thought by some as being on the verge of taking over the U.S. as the economic leader. The beginning of the 1990's brought a recession to Japan and the country still hasn't recovered. Now, that is a country that's economic fundamentals aren't strong. The U.S. economy has faced challenges before. It has faced much greater challenges before, and each and everytime our economcy has thrived. This time it will thrive again.

2) Straight talk

Here is the straight talk. The government can't regulated stupidity, greed, recklessness or carelessness. The government can regulate fraud, theft, lying and cheating. That's what a McCain Presidency will end on Wall Street. The government can't stop companies and CEO's from acting stupid, greedy and reckless, however if anyone of them act fraudulently then the full force of the U.S. government will come down on them. The McCain Presidency will frown on stupidity but fraud will not be tolerated.

3) Sometimes the cure is worse than the ill

Barack Obama sees the Wall Street crisis and promises all sorts of new oversight and regulations. He wants to tell Wall Street how to manage their business. The last time we had such a crisis the result was Sarbones Oxley. All that did was drive business out of the country. A plethora of new regulations and oversight will simply make it impossible to conduct financial services in America. All that will do is drive the financial center outside of the U.S. The free market is the best regulator and that is what John McCain will count on to dole out regulations

4) No more bailouts

John McCain's administration will end the practice of bailouts. The worst thing that can happen is that an irresponsible person or business has their irresponsibility rewarded with a bailout

5) Reform Fannie Mae and Freddie Mac

These are the two institutions that have significant systemic structural problems. Under the McCain administration, these two organizations will go through a dramatic transformation. (and if he asked me what to do) They will be privatized and then they will be broken up.

Now, if McCain did all of that, he could let Obama talk down the economy and look like a pessimist. He could allow Obama to promise sweeping reforms and regulations and ask for specifics. He could counter a big government solution with a small government solution that focuses on his signature issue, rooting out corruption. This approach would play to all of McCain's strengths.

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