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McCain: Everything I Know About the Economy, I Learned from Alan Greenspan

March 17, 2008

Timing, as they say, is everything. By that measure, John McCain is having a very bad day. First, just one day after his own visit to Baghdad, Vice President Dick Cheney showed up in Iraq to remind Americans that McCain is inextricably linked to President Bush. Then just as the Federal Reserve rushed into to bail out faltering Wall Street investment banks and avert a financial panic, its former chairman Alan Greenspan disavowed any responsibility for it. Sadly, everything John McCain knows about the economy, he learned from Alan Greenspan.
McCain long ago made clear that the American economy is not his strong suit. In November 2005, McCain acknowledged:

"I'm going to be honest: I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated."

Two years later, McCain admitted making little progress in grasping Economics 101. As the Boston Globe reported in December 2007, economic policy is "a subject on [which] McCain has said he feels he [is] unknowledgeable [and] that filling the void would be a priority when selecting a vice-presidential nominee." To address this glaring shortfall, the soon-to-be Republican presidential nominee claimed he had turned to the equivalent of Economics for Dummies:

"The issue of economics is not something I've understood as well as I should. I've got Greenspan's book."

Given the housing market meltdown and the hysteria gripping Wall Street and the global financial system, Americans should be concerned about the identity of McCain's mentor. After all, Greenspan's bubblenomics played a critical role in bringing the United States to the brink of economic disaster.
In a stunningly prescient April 2004 article ("There Goes the Neighborhood") in the Washington Monthly, Benjamin Wallace-Wells argued that home prices were about to plummet and take the economy down with them.

During the last week in February [2004], when Greenspan recommended that the home-owning public take a good hard look at switching from fixed-rate mortgages, under whose terms payments stay the same no matter what interest rates do, to adjustable rate mortgages (ARMs), where payments fluctuate along with interest rates--which, right now, makes close to zero sense. Interest rates are lower than they've been in 30 years, and, with all economists predicting a general economic upturn, and Bush's budget deficit and the weak dollar sucking up capital, little doubt exists that interest rates must rise, in which case, switching from a fixed-rate to adjustable-rate mortgage would be pretty costly for any family naive enough to take Greenspan at his word. The episode did not pass completely without critical notice. It was "the strangest bit of advice ever to be proffered by an American central banker," Jim Grant, publisher of Grant's Interest Rate Observer, told the San Francisco Chronicle. Then the press moved on: "Oh, it's just Greenspan"...
...Greenspan's rather ham-handed effort to get them to go for ARMs, is a sign not of the chairman's own eccentricity or advanced age, but, instead, of the economy's current unsteadiness. Greenspan knows, perhaps better than anyone, that this economy is perched nervously on top of a wobbly, Dr. Seuss-like tower. Our recovery is propped up by consumer spending, which is in turn propped up by mortgage refinancing, and if that refinancing dries up before more props can be put in, the whole edifice could fall. "Since long-term interest rates cannot fall low enough to facilitate another wave of fixed-rate refinancings, he is trying to encourage homeowners to refinance one last time: fixed to ARM," Peter Schiff, president of Euro Pacific Capital in Los Angeles told the San Francisco Chronicle.

Over the previous five years, Americans had extracted almost $1.6 trillion in cash from refinancing and spent virtually all of it on consumer goods purchases. As Wallace-Wells noted four years ago, "Greenspan has played enabler to this boom," and concluded:

"To get out of the recession, he had to rely on, stay mum about, and even encourage a housing bubble. Now, that very bubble may be the thing that destroys the recovery he has sought to create."

Fast forward to 2008 and the chickens are coming home to roost for Wall Street and American homeowners alike. On Friday, the Federal Reserve scrambled to forestall the collapse of Bear Stearns, which had been at the forefront of the troubled mortgage securities marketplace. Sunday, JP Morgan purchased Bear Stearns for just a fraction of its share price just days earlier. 24 hours later, the Fed acted again to quiet plummeting financial markets worldwide and avert panic in New York. As the New York Times reported:

Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.
In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.
The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation's financial markets from what officials feared could be a chain reaction of defaults.

But writing in the Financial Times on Sunday, Alan Greenspan seemed blissfully unconcerned about the frenzied market intervention of his successor, Ben Bernanke, even as he acknowledged that "the current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the Second World War". Speaking in his trademark dry, detached language, Greenspan ironically looked to the salvation of "market flexibility and open competition." More ironic still, given Wallace-Wells' history, was Greenspan's conclusion:

"But if, as I strongly suspect, periods of euphoria are very difficult to suppress as they build, they will not collapse until the speculative fever breaks on its own. Paradoxically, to the extent risk management succeeds in identifying such episodes, it can prolong and enlarge the period of euphoria...
..In the current crisis, as in past crises, we can learn much, and policy in the future will be informed by these lessons."

For the American people, one lesson should surely be obvious. When it comes to risk management, the United States cannot risk having John McCain and his Alan Greenspan crib notes at the helm of the troubled American economy.

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Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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