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| washingtonpost.com - Sebastian Mallaby (washingtonpost.com)
One year ago, it seemed reasonable to hope that the mortgage crisis would be contained. Since then, just about everything that could go wrong has gone wrong. The crisis has spread through the financial system and is metastasizing into a global slowdown. It cries out for a bolder government response than we have seen so far. So here is a test for candidates McCain and Obama: Which of you would provide it?
Until just recently, policymakers were doing well in the financial crisis. Congress passed a timely and well-crafted stimulus. Bear Stearns was rescued, averting market chaos. The Fed cut interest rates aggressively, reasonably fearing a collapse of the economy more than a collapse of the dollar.
Capitalism has triumphed everywhere, but it's time to dust off an old socialist slogan. When it comes to housing finance, the commanding heights of the economy must be nationalized. Last night's statement from Treasury Secretary Hank Paulson was designed to look statesmanlike and measured, but it misses an opportunity.
A few years back, when "subprime" generally referred to beef, economists used to congratulate themselves on their progress since the 1970s. Central banks had learned to tame inflation. Politicians had learned to appreciate the folly of price controls. Thanks to the economics profession, policymakers had grown wiser.
Ever since J. Pierpont Morgan was simultaneously reviled and celebrated a century ago, the titans of banking have enjoyed a special place in the popular imagination. Their economic clout, political influence and sheer wealth have inspired justified awe; the alumni of a single firm, Goldman Sachs, include the current Treasury secretary, the White House chief of staff, New Jersey's governor, the World Bank boss, the head of Italy's central bank and the Nature Conservancy's incoming president. Yet there are questions about what modern investment banks do -- and last week's ructions at Lehman Brothers only make these questions trickier.
John McCain likes to say he is for economic growth. "End growth in America, and the lights go out all over the world," he has admonished. He offers a version of the narrative that Republicans have pitched for years: Their party stands for lower taxes, less regulation and freer trade; Democrats stand for tax-and-spend, government intrusion and trade protectionism. But this juxtaposition, at times reasonably persuasive, now rings hollow. The real pro-growth candidate in this campaign looks to be Barack Obama.
We are now several months into the global food crisis, which is a much bigger deal than the subprime meltdown for most people in the world. Food prices have almost doubled in three years, threatening to push 100 million people into absolute poverty, undoing much of the development progress of the past few years. The new hunger has triggered riots from Haiti to Egypt to Ethiopia, threatening political stability; it has conjured up a raft of protectionist policies, threatening globalization. And yet the response to this crisis from governments the world over has been lackadaisical or worse.
Of all the strange features of this presidential race, the tarnishing of Barack Obama has got to be the most ridiculous. First Obama was accused of anti-religious elitism. Then he was accused of identifying with the underclass anger of his spiritual mentor. Excuse me, but which is it? Am I supposed to believe that Obama is a supercilious elitist or a menacing ghetto radical? Is he contemptuous of religion or too close to a religious leader? Obama's critics don't bother to say. Meanwhile, real character issues go relatively unheeded.
Presidential candidates insist that Washington needs fixing, and we in the commentariat love to expose hypocrisy, pork-barreling and gridlock. So it feels awkward to admit the truth about the subprime meltdown. First Congress produced a timely and well-crafted stimulus. Now it is working on proposals to help homeowners, and with one ugly exception, the recommendations are sound.
There are two views of the financial crisis. The first is that we face the bursting of a real estate bubble, a product of loose monetary policy, no-doc loans and alphabet-soup financial securities. The second is that we face the bursting of that bubble plus a terrifying long-term one that has been building since the Reagan era. This second bubble is the product of a quarter-century expansion in borrowing, excessive confidence in the dollar and an overblown faith in markets.
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