McCain's Debate Decision

Sen. John McCain has stated that he would suspend his campaign and hoped to delay the first debate scheduled for Friday because of the fiscal crisis and that Democrats and Republican leaders, plus Sen. Obama and himself could work out a deal to figure out how to deal with the toxic paper crisis.

Democrats sneered at the idea. They mocked him as did David Letterman. Anonymous emailer thought that this made him look weak and that it was showing he was unprepared to deal with this week's debate. I didn't particularly think it was a good idea, either tactically or as a strategic position. It clearly was an attempt to get inside Obama's OODA loop again, and I think it misfired. A snap poll seems to bear this out - people want to see the debate go on as scheduled.

The media would never portray McCain's actions as the responsible thing to do. They'd portray it as a political stunt even if it was for the good of the country to come together to figure out how to deal with this toxic paper mess. McCain was weighing the following possible outcomes that Obama would choose from: 1) accept the idea to postpone the debate to work on the fiscal mess together and he looks Presidential in the process while Obama gets bipartisanship in the process; 2) Obama rejects the deal, and McCain looks presidential while Obama looks partisan; and 3) Obama lets others answer for him.

I don't particularly think it was a good idea for McCain to suspend his campaign to work on the fiscal crisis no matter how well intentioned. If anything, Democrats are portraying this as a sign of weakness and inability to handle multiple concerns at one time. In fact, the Obama campaign made that very point. They see this as a bluff, and claim to have called him on it.

Sen. Harry Reid, the Senate Majority Leader, basically told McCain to shove it and that he isn't needed.

The fiscal mess was created by Congress and incessant leaning on the financial companies to lend to those individuals who were incapable of repaying, followed closely by those same lenders repackaging the now toxic paper to sell on the secondary markets spreading the risk and the losses throughout the fiscal system. Congress is quite unlikely to fix the mess no matter what compromise decision is reached, but billions will be spent nonetheless.

McCain trying to call attention to this mess by suspending the campaign and attempt to delay the debate so that McCain and Obama, two US Senators who have been spending their time of late running for President, but who are still US Senators with all the rights and responsibilities thereof, need to deal with the issue at hand might have been a noble idea, but it missed its mark.

Then, there's the issue of defining the problem. Is there indeed a credit crunch or not? Megan McArdle points to a possible wider meltdown, but Alex Tabbarok points out that most parts of the credit market are quite liquid, but short term asset backed securities, plus interbank lending is in trouble:

A credit crunch does exist in the sector of the market based on short-term, asset backed securities. In addition, interbank lending is unusually risky. But in light of what I have just said the "credit crunch" takes on a new meaning and potential new solutions are suggested. The first question I have is this. Investment banks were selling these securities and using the money to lend to whom? I do not know the answer. But let's suppose that the money being raised in these markets was being lent to productive businesses. If so, then any solution should focus on feeding those businesses that are starved for credit.

I look at the situation as follows. Banks are bridges between savers and investors. Some of these bridges have collapsed. But altogether too much attention is being placed on fixing the collapsed bridges. Instead we should be thinking about how to route more savings across the bridges that have not collapsed. Government lending may be one way of doing this but why lend to prop up the broken bridges? Instead, why not lend directly to the investors who are in need of funds? After all, if these investors exist and have valuable projects that's where the money is! Let the broken bridges collapse, taking the shoddy builders with them. Instead focus on the finding and rescuing the victims of any credit crunch, the investors who need funds.

On that latter point, the broken bridges involve real folks, real businesses, and billions of dollars. That's why we keep hearing about bailouts on massive scales. We're still in a process of trying to determine the scope and scale of the problem, identifying those who need to be bailed out, and what actions should be taken.

It should come as no surprise that someone like Warren Buffett is pushing for the bailout, since it clears the way for his company to make further acquisitions without incurring the risk of toxic paper. Those on Wall Street supporting the plan are those who see the bailout as a way of shifting the risk of loss from any business decision to the government - which really means taxpayers. So do foreign bankers, like the Japanese, who went through a meltdown of their own in the 1990s and are now awash in cash. In a way, the markets have already punished the banks and actors who were involved in the mess, and are being taken out by more nimble and capable businesses. Buffett and others figure that the process would go much quicker and be safer for them if the government greased the wheels with billions in bailouts.

The problem is that any bailout should not adversely affect those businesses that are on sound financial footing, which happens to be most banks and fiscal institutions:

While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.

A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.

That plan would also have the benefit of supporting home prices by encouraging prospective buyers to get into the game, while giving sellers a possible buyer to help them out of their bad loan positions.

Meanwhile, the House passed a $25 billion bailout for the US automakers, and no one bothered to raise an eyebrow. Bad business decisions and unending regulations and union rules have made the US automakers unprofitable. A bailout will do little to fix these companies. It only enables them to limp along, but forces them to be far more beholden to their government masters.

UPDATE:
Lest you think that the Democrats aren't above blatant political theater of their own, you get this:

But yesterday, Reid demanded that the White House made sure the legislation had John McCain’s backing, and Reid floated this bogus piece of news clearly intended to force McCain’s hand: “I got some good news in the last hour or so … it appears that Sen. McCain is going to come out for this.” McCain flatly denied that he had endorsed the plan.

So Harry Reid says that it’s essential that John McCain backs legislation designed to avert the greatest economic meltdown since the Great Depression. And when McCain says the highly problematic legislation, in its current form, is not good enough, Reid tells McCain to stay away from Capitol Hill. Who’s playing politics with economic crisis?

Reid tried to back McCain into a corner, and force him to support a flawed piece of legislation, and McCain responded in a way that Reid didn't expect so that Reid is now telling McCain to stay away.

UPDATE:
President Bush has called for a meeting on the crisis at the White House tomorrow. He wants House and Senate leaders plus both McCain and Obama to be present.

President Bush has invited both presidential candidates and the leaders of the House and Senate to the White House on Thursday in hopes of securing a bill to rescue the economy.

Bush took the unusual step Wednesday night of calling Democratic Sen. Barack Obama directly to invite him to the meeting, White House press secretary Dana Perino said. An Obama spokesman said the senator would attend. The White House has also invited Republican Sen. John McCain.

I don't think it's really that unusual, because the crisis isn't likely to abate after the elections and the inauguration next year. Whoever is the next President will have to deal with the mess, so having them involved in the process along the way makes good sense.

UPDATE:
This post by Big Lizard is an excellent primer on how we got into this mess in the first place, and what the Paulson/Bernake plan proposes. While the media calls it a bailout, the details suggest that it is something much less. It simply buys the toxic paper at a cut rate discount (since no one knows the true value). It then determines the value and resells them at auction. There is even the possibility of a profit on the deal. The $700 billion is an authorization limit, not what is expected to be spent.