The problems on Wall Street are becoming worse day by day. Two historic investment banks, Lehman Brothers and Bear-Sterns, collapsed while Merrill Lynch was sold to Bank of America in a fire sale. Retail banks, such as IndyMac and WaMu, have failed leaving people unsure about their deposits at banks across the nation. Fannie Mae and Freddie Mac have been placed in conservatorship by the U.S. Treasury Department while American International Group (AIG) needed an $85 billion loan to stay afloat. However, in this election season it is important to get the facts straight and to understand who and what caused the crisis.
The failure of the financial institutions on Wall Street was not due to lax regulation or the failure of the free market. Instead, bad legislation passed by the Congress and government intervention caused the crisis.
First, there are two pieces of legislation that need to be brought to your attention: the Community Reinvestment Act of 1977 and the Community Reinvestment Act of 1995. To outlaw “redlining” or racism in the banking world, the Community Reinvestment Act of 1977 pressured banks to lend to people with questionable income and credit history. If the banks did not comply, they would not receive regulatory approval from regulators to merge or conduct other banking activities. The act ignored the fact that banks were unwilling to lend to people because of their financial status, not because of their race. The Community Reinvestment Act of 1995 was a rehash of its 1977 predecessor but increased the amount of money banks had to lend to questionable borrowers. Fearful of the risks of subprime loans, the banks repackaged the loans and sold them to investors in the marketplace in a process known as securitization.
After the housing bubble burst, housing prices started to fall. People saw their monthly mortgage payments skyrocket, were unable to refinance their existing mortgage, and eventually defaulted. Investors, who held the mortgages in investments known as mortgage-backed securities, lost their money because the security lost its value. This led to the massive write-downs on Wall Street and the collapse of the aforementioned banks.
Didn’t investors know the risks? Not really. Why? The three rating agencies that rate debt-Fitch, Moody’s and Standard and Poor’s-have a government-sponsored oligopoly. No one else is allowed to compete with them because these three institutions were the smartest, according to the government. However, these three badly miscalculated the risks and left investors-and now taxpayers-holding the bag.
There are more examples of bad regulation, like mark-to-market accounting, but space is limited.
The situation is dire and a bailout will not immediately fix the problem. However, Congress could pass a real stimulus package that would help alleviate the problem. It would include: making the George W. Bush tax cuts permanent, cutting the egregiously high corporate tax rate and-to borrow a line from Larry Kudlow-a policy of Drill! Drill! Drill! Keep in mind, Sen. John McCain (R-Ariz.) supports all of these policies.
An August report titled “Taxes and Economic Growth” from the Organization for Economic Cooperation and Development (OECD) showed that the United States’ combined federal and state corporate tax rate is 39.25 percent-the second highest corporate tax rate among the 30 developed member nations of the OECD. Therefore, the United States corporate tax rate is 50 percent higher than the OECD and according to the study, “corporate taxes are most harmful for growth, followed by personal income taxes and then consumption taxes.” John McCain is staunchly committed to lowering corporate taxes because he understands that high corporate taxes are bad for business, workers and America.
To lower gas prices, McCain supports offshore drilling. Lower gas prices mean people will have more money to pay off their mortgages which will help stabilize the housing market. In addition, more drilling means the creation of blue-collar union jobs right here in America.
Government intervention created the current financial crisis. Therefore, let us elect the man who wants less government, lower taxes, and who will “stand on your side and fight for your future.” Vote for McCain this November.
Thomas M. FosterTreasurer Miami University College Republicansfostert2@muohio.edU