ON BIG DEBT AND SMALL GOVERNMENT

10/8/08

The markets being what they are of late, I have time only for a few random thoughts on recent financial and political developments:

--Hank Paulson said again today that declining home prices are at the root of our economic and financial problems. Mr. Paulson’s view on this topic is very much in line with the consensus thinking, which is very wrong. Declining home prices, as I have said many times before, might be down the trunk of this problem, but they are not at its root. The root of this problem lies in too much spending and too much debt, primarily at the household level, but also at the governmental and corporate levels. Homes and home equity loans were merely the vehicles that consumers used to facilitate their excessive borrowing and spending. Since this is the case, even ending the downward spiral in home prices will not solve our current problems. We will not be out of the woods until the current “spend, spend, spend, borrow, borrow, borrow” ethos is wrung out of our society. That will take a long time.

--Wait until the credit card problem rears the full manifestation of its ugly head. The MBS market has been decimated, as we all know. The ABS market is next. Yes, we’ve seen slowness and plenty of outright defaults on unsecured lines of credit, but there is plenty more to come. Again, our economic problems are far, far from over.

--At the “debate” last night, John McCain (Did you know he was a POW in Vietnam?) “outlined” a vague plan for the federal government to buy up mortgages and renegotiate with the debtors in order to arrest the decline in housing prices. Such a plan would make the federal government the nation’s largest home lender and mortgagee. (Mr. McCain, never much of an original thinker, apparently shares the common wisdom that it is home prices that are at the root of our financial and economic difficulties.) Later in the same debate, Mr. McCain (Did you know he was a POW in Vietnam?) castigated Barack Obama as being a politician who is forever looking to the government for solutions, always telling people what government can do for them, while he, John McCain (Did you know he was a POW in Vietnam?) is in favor of limited government, small government. Is Mr. McCain (Did you know he was a POW in Vietnam?) so befuddled that he lacks any sense of irony? Does he have any idea what he is saying when he claims to be in favor of less government, or is that just another of the verbalized bumper stickers that passes for thought in his (and most) campaigns? Is “limited government” even a principle of the GOP, or merely a convenient cudgel with which to beat up those at the lower rungs of the economic ladder who look to the government for help?