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Monday, September 29, 2008

Post Bailout: What McCain Can Still Do

At this point, passing the bailout continues to be dicey. I firmly believe that he missed a huge opportunity when he tacitly backed this bailout rather than backing a more market friendly way out of this crisis. Here is how Dick Morris put it.

The bailout ideas proposed by the House Republicans and trumpeted by former Speaker Newt Gingrich make eminent sense. Indeed, they make so much sense that it is as if the roles of the parties have been reversed. It is the Republicans who are demanding that the banks and financial institutions pay for their own bailout, granting them only a mixture of loans and premium-paid insurance, while the Democrats want to pass the hat among the taxpayers to buy their dirty paper.

In an unusual act of political foresight and skill, the normally dead-headed House Republican leadership has crafted a platform that can carry the party to victory in November. All that remains is for the Party’s candidate - and perhaps even its president and Treasury Secretary - to get on board. McCain can recover at the negotiating table the economy issue he lost in Friday’s debate. He needs to have the courage of his convictions and insist on a bailout without requiring taxpayer-funded purchase of defunct mortgages from failing institutions.

The difference in the bailout plans is, of course, largely cosmetic. Dead paper is dead paper whether it is on the books of the government, purchased from banks, or on the books of the banks, insured by the government. The game is the same: Through loans or grants fund the deficient debt service on the defaulted mortgages until homes can recover their value in the cyclical real estate market.

The opportunity to oppose the bailout is over, and the time is over to back a plan that would attempt to solve this through market forces.

That said, this bailout can and should dominate each and all debate over the economy. That's because it is the main priority of the next President. Any candidate who thinks they can propose new spending like universal health care, infrastructure, or education is a fool and naive. The only thing the next President will be able to do for at least the next two years is manage the execution of this bailout.

This gives McCain a new opportunity for McCain to once again re focus the debate. This maybe his last chance to snatch victory from the jaws of defeat. What McCain needs to do is to explain the potential corrosive effect of this bailout on the economy, and how it ties to one of his favorite causes, spending. This bailout will be financed through serious infusion of bonds. The government will take on massive new debt. When the government takes on massive new debt two things happen. First, it puts inflationary pressure on the economy. Second it weakens our currency. The way to counteract each of those things is for the government to SPEND LESS. The massive new debt will put enormous inflationary pressure and enormous downward pressure on the Dollar. The only way to counter act this is to cut spending and reduce the deficit in other ways.

Now, Barack Obama proposes to cut taxes on 95% of the folks. Yet, 40% of the folks don't pay taxes at all. That isn't a tax cut but a welfare check. In other words, it adds to spending. He proposes increases in health care spending, education spending, infrastructure spending, and spending on alternative energy, and this is among what some estimate to be one trillion in new spending. Tax cuts mean nothing if they usher in an era of hyper inflation. If the government adds a trillion dollars in new spending after a $700 billion bailout, that's exactly what will happen.

McCain needs to point out that his tax and spending proposals will balloon the price of gasoline, food, and other everyday items. A one thousand dollar check means nothing, if that check causes your everyday bills to go up by two thousand dollars yearly. That's exactly what Barack Obama's tax and spending proposals will do. They will usher in an era of hyperinflation. McCain needs to point out that someone that themselves asked for $1 million Dollars daily in earmarks is not credible in counteracting the pork that will no doubt be laden in each and every spending bill that would come across his desk.

In the last debate, Barack Obama couldn't name a single program that he was willing to cut. He has made his whole campaign around providing things for the little guy. What John McCain needs to do is explain to the public that as a result of this bailout, their needs to be a priority on limiting spending. If Congress continues to spend as they have it will cause massive inflation. If that happens, there are no tax cuts. You can't have a President that got elected buying the votes of every aggrieved group. That's exactly what Barack Obama is. If he is elected spending will be out of control. If spending is out of control, it will cause hyper inflation in the aftermath of this bailout. That will be a disaster for all Americans. That needs to be John McCain's economic mantra. If he does that, he still has a chance to snatch victory from the jaws of defeat.

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