GroundReport | New York | Presidential Debate Rewind; What The Candidates Should Have Said

Presidential Debate Rewind; What The Candidates Should Have Said

Paul Sterne September 28, 2008

Friday night’s debate was a general disappointment. Neither candidate came across as having a firm grip on the future of the nation.

When asked about the bail-out, the candidates should have stated the obvious; no one understands the bail-out. Virtually no one watching Friday’s debate knows how it will work and who will benefit in the end. These guys should have started by explaining the bail-out and Jim Lehrer is to blame for not asking the right lead question: “Mr. Obama, how will the bail-out work?” “Mr. McCain, who will benefit from the bail-out?” I doubt either candidate really knows the answer to these simple questions.

Then when Mr. Lehrer asked them if they ‘supported the bail-out’, they could have answered the question based on common definition of the bail-out. If I could have coached the candidates, I would have instructed both of them to say “No, I don’t support the Paulson bail-out ”.

Mr. Obama should have answered that his bail-out would involve resetting mortgages to 2002 price levels. Resetting mortgages to price levels before “Easy Money Al” Greenspan dropped the Federal Funds rate below 2% on January 8, 2002 to stop the collapse of the dot.com bubble, only to replace it with the housing bubble, would solve this problem in one fell swoop. Mr. Greenspan, a Republican, kept the Fed Funds rate historically low, dropping it to 1% on July 16, 2003 so that George W. Bush could get re-elected in 2004. On January 8, 2002, the price index in the New York Metropolitan area stood at $391,000; by the peak of the bubble two years later in February 2006 it stood at $595,000, 52% higher. Under a voluntary program, the Government would take equity in an individual mortgage equal to the principal value of the mortgage minus the home’s January 2002 value and the homeowner would pay a fixed rate 30-year mortgage only on the 2002 value. The Government would pay cash to the bank for the difference between the current principal and 2002 price level and thereby reduce the size of the mortgage to the 2002 home value – that’s the bail-out part. At sale of the home, the Government would recover any value above the 2002 value. Over thirty years, the Government would get back most of its money.

With respect to the bail-out, Mr. McCain should have had the courage to say it violates the principles of the Republican Party. Mr. McCain should have pointed out the problem started when investment banks changed from private partnerships investing their own money to public or quasi-public companies using other people’s money – either in the form of public equity, debt or money market funds. Any financial institution using other people’s money needs to be regulated because a management system driven by greed will always result in the institution taking on too much risk to boost executive compensation. Back in the good old days when Lehman Brothers was formed in 1850, if the partnership made a bad investment, the partners lost the money so they were personally motivated to avoid excess risk. Now that the investment banks have morphed into universal banks on the European model, Mr. McCain should have gone back to his Teddy Roosevelt playbook and offer the following solutions. Step 1: Change the Federal Reserve's dual mandate -- monetary stability and economic growth. The Fed should focus only on monetary stability (i.e., monetary policy) and the legislature and executive branches on economic growth (i.e., fiscal policy). The dual mandate has resulted in a bipolar Fed flip flopping between fears of inflation and recession. The stimulus part of the mandate is what is causing all these bubbles. Step 2: Any entity using other people's money in any form has to be regulated and its leverage limited to prudent levels. That includes every kind of financial asset -- loans, stocks, bonds, options, futures, derivatives, commodities, swaps, deposits, etc. In the good old 1930's leverage on stocks was limited to 2:1; the same needs to apply to futures, options, derivatives, swaps and commodities. Step 3: Reassert anti-trust laws and break up companies when they become too big to fail. AIG should not have been allowed to get so big that it could bring down the global financial system. Had Mr. McCain stood at the podium and listed these Teddy Roosevelt solutions to today 's crisis, he would be on his way to being the next President.

In the matter of Iraq, the candidates had a lively debate on the difference between a strategy and a tactic. Though Mr. McCain won the argument on TV by shouting down his opponent, Mr. Obama was, in fact, right – the surge is a tactic, not a strategy. Mr. McCain, a ‘legacy’ Annapolis midshipman,who finished 894 out of his class of 899 at the Naval Academy, probably doesn’t know the difference because he didn’t study – then again we all acted up in college. Mr. Obama should have stated forcefully that ‘the strategy was to invade Iraq in the first place and that the surge was just a tactic to fix a flawed strategy.” Someone should also call Mr. McCain on his comments regarding the opinions of General Petraeus and Admiral Mullen regarding Mr. Obama’s ‘understanding’. If the non-partisan US military establishment is weighing into this election by saying things like, ‘Mr. Obama, you don’t understand!’ to bolster the candidacy of Mr. McCain, the real problem in the United States is showing its ugly little head -- the military industrial establishment really runs the show and the civilians are just window dressing.

Which leads to the ‘earmarks’ part of the debate. Mr. McCain kept talking about $18 billion in earmarks and $900 million of Obama earmarks. Well, compared to the cost of the Iraq War at $10 billion per month, Mr. McCain was ‘majoring on a minor’ as my old boss used to say. Mr. Obama needs to look the American people in the eye and say, “$10 billion per month, $10 billion per month, $10 billion per month, Mr. McCain, you don’t understand!”. But then again, Admiral Mullen probably called Mr. Obama before the debate and warned him to stay clear of the cutting the military budget or he will lose the election. Had I been on the stage, I would have said “We will cut the military budget from 7% of GDP to 3% of GDP – still the highest rate in the world -- and save almost $400 billion per year. That would pay for ½ of the bail-out”. Nice clear answer for Mr. Lehrer, but these carefully vetted candidates don’t have the guts to take on our American Caesars, General Petraeus and Admiral Mullen.

When Mr. McCain looked in the eyes of Vladimir Putin, he didn’t see his soul – which was the best joke of the evening – but the letters KGB. Then he repeated the letters for emphasis. For the potential leader of the free world, this was a moment of unrestrained recklessness. Imagine the Russian Prime Minister saying on television that when he looked in the eyes of John McCain, he show three words, United States Navy. The comment would be laughable and scary at the same time. John McCain has now dug himself a deep hole with the Russians; a hole that will take lots of military spending to fill. I was in Moscow last week and, to the man, the Russian businessmen, read quasi-liberals, were bemoaning the start of a new Cold War which would deflect investment from infrastructure to the military. Now that Russia is the world’s largest energy exporter and the United States is the world’s largest energy importer and the Russian have $600 billion of foreign reserves and the US has a huge and growing national debt, we need to find a way to work with the Russians, not taunt them.

Which brings us to the unfortunate remarks on Georgia and Ukraine in the debate. Though it is clear that the candidates have to pander to the relatively low level of geo-political knowledge of the US voter, both candidates needlessly pushed for the inclusion of Georgia and the Ukraine in NATO. This is a very bad idea and will lead to a hot war with a resurgent Russia. Inclusion of Georgia and the Ukraine in NATO is not in the national interest, just like the invasion of Iraq was not in the national interest. Putting NATO forces on the border of Russia will not increase global stability but decrease it. Think of it this way, if Russian allies had troops on the Mexican border, would the balance of power be more or less stable? As the Economist wisely suggested, Georgia and the Ukraine need to be integrated into the European Union, not the NATO alliance, to support their evolution towards freedom and democracy and the elimination of the corruption as the organizing tenet of their markets. Free markets are not nearly as important as fair markets for the promotion of in prosperity and well-being.