The stock market's spasms and the housing meltdown have dominated the presidential campaign for the past several weeks. The distraction of the "Down Jones" industrial average, however, means we might be forgetting how we got into this mess in the first place: through the abysmal state of consumer protection and the general unfairness of our marketplaces.
Presidential candidates John McCain and Barack Obama have risen to the occasion -- if you want to call it that -- by trading barbs about old scandals and offering up partially baked plans to restore the economy. That's sad, because both have made some serious proposals aimed at restoring fairness and integrity to U.S. markets. One can only assume consumer protection is no longer among their top priorities.
It should be. Not only is rampant unfairness bad for the consumers it cheats, it's bad for the economy as a whole. As we've seen, ill-gotten gains earned by deceptive companies create an economic house of cards – one that eventually must collapse. The only way to prevent the next boom and bust is to ensure a fair marketplace.
The stock market is supposed to act like a canary in a coal mine, with super-smart traders signaling economic trouble in advance by bidding down shares. In this case, however, Wall Street seemed to be the last to know that things were headed south.
Cracks in the U.S. regulatory system began to show early this year. There was poisoned imported food, sudden dog deaths from tainted pet food and lead-laden toys from China. (The New York Times found that The Consumer Product Safety last year had only one person inspecting foreign-made toys. How many of your child's toys are made in the U.S.?)
Is it any wonder, then, that as recently as last year mortgage brokers continued to flood the airwaves with advertisements for "1 percent" mortgages, even after the housing collapse had begun? There was no one in Washington, D.C., or New York listening to the screams of "iceberg, dead ahead." The collapse of the stock market indicates that the ship is going down and we're all scampering for the limited lifeboats. But women and children aren't getting them: Guess who is?
There is hope. Digging through two years of speeches and policy papers from the candidates, an enterprising voter can find references to this general unfairness, and plans for restoring the various malfunctioning marketplaces.
Sen. Obama's proposals are more fully formed than Sen. McCain's, but the McCain camp says that's by design. In an interview several months ago, McCain economic adviser Dough Holtz-Eakin said that McCain would do whatever it took to restore fairness to the mortgage market and other consumer hot-spots, but would need flexibility to deal with current market conditions as they exist in January 2009.
"The basic instinct of the senator is it's not enough to go in after the fact and trumpet a lot of regulations," said Holtz-Eakin. Despite the Republican Party's longstanding hands-off economic stance and anti-regulation bias, he said McCain was persuaded that there is a place for government intervention to ensure "fair and open competition."
Holtz-Eakin wasn't kidding. McCain surprised nearly everyone during the second presidential debate when he proposed perhaps the most active government intervention since The Great Depression, saying that if elected he would direct the Treasury Department to buy up $300 billion worth of ill-conceived consumer mortgages.
The plan, while very late in coming, is at least a good start. The notion of direct government purchases has been around for a while, proposed by Hillary Clinton's campaign much earlier this year and championed by a variety of economists. It is the first sweeping plan that would deal with the fundamental problem of the housing meltdown and the current recession: the growing glut of empty homes for sale.
The original bailout plan -- buying up $700 billion of nearly worthless mortgage backed-securities and other loan paper on Wall Street -- is an indirect solution that simply might not work. In fact, it has already been partly abandoned, with Treasury now using much of that money to buy direct stakes in banks instead. So a massive direct home purchase and refinance plan is an idea worth developing.
I wish McCain's economists had developed it, however. It has at least one massive flaw: The government would buy the mortgages at their full "hold-to-maturity" value, rewrite them to reflect their lower market value and eat the loss. That means the plan would be a bonanza for the banks that made all those crazy loans, and force taxpayers to eat the bill. That's a terrible policy that wouldn't survive a single congressional hearing.
Structured other ways, however, direct housing repurchase has a place in the economic recovery plan. For one model, look to the Illinois attorney general's office, which recently settled a lawsuit with the former Countrywide Mortgage for predatory lending. Under the deal, Countrywide's new owner, Bank of America, must restructure some 400,000 loans and eat the loss.
There are other holes in McCain's plan. The biggest: Who gets the help? Wouldn't some homeowners be incentivized to stop paying their mortgages so they could qualify for the great new rate, offered by Uncle Sam? You don't have to be a naysayer to imagine the chaos of implementing such a plan.
Still, it's worth exploring. And it's certainly no more complex than figuring out how to buy up credit default swaps. Unfortunately, right now, you get the sense that in Washington, direct home purchase is the absolute last bullet that will be fired in the rescue plans, the last boat lowered from the deck of the Titanic. History will view that as a great strategic error.
Unfortunately, Sen. Obama has rejected McCain's home repurchase plan, at least for now. Instead, he unveiled a measured economic plan last week with stop-gap measures such as a 90-day moratorium on foreclosures and extended unemployment benefits. Keenly aware of his lead in the polls, it appears Obama sees no need to risk bold proposals now.
That's too bad, because Obama has made bold proposals in the past, offering far more specific plans on many consumer issues than McCain. An Obama policy paper on new consumer protections can be read here.
McCain's economic plan can be viewed here.
In the realm of credit cards, Obama has long supported a new consumer "Credit Card Bill of Rights," which would prohibit credit card companies from raising rates and retroactively applying the new rate to old balances. It also would bar issuers from charging interest on penalty fees, and it would make banks apply payments to highest-rate balances first, rather than low-rate balances – a policy aimed at sticking it to consumers who take advantage of cut-rate balance transfer offers.
Obama may yet get to put his vote where his promises are. Last month, the House passed a Credit Card Bill of Rights. The Senate could take up a companion measure, but it will likely be postponed until the new Congress convenes next year.
Obama has said he would go further, and create a five-star rating program for credit card offers. The Federal Trade Commission would be instructed to rank credit cards and banks according to a series of consumer-friendly practices and publish these ratings. Critics have said the plan is unlikely to work and would create an enormous new responsibility for the Federal Trade Commission.
McCain's office has not issued a policy position on the Credit Card Bill of Rights.
Even if the federal government figures out a way to solve the empty house problem, there still is the important matter of making sure this kind of mortgage mess never happens again. Ensuring fairness in the mortgage marketplace is a big part of that. To that end, Obama has called for creation of a simple indicator to tell consumers how expensive their mortgage could become -- called a HOME (Home Obligation Made Explicit) score. This score would call attention to possible unexpected costs of adjustable rate mortgages and other potential booby-traps in home loans. Obama would also change the tax code to make it easier for low- and middle-income tax filers to get home mortgage tax deductions.
McCain hasn't issued specific policies on mortgage clarity.
Neither camp has said enough about direct culpability for those who take advantage of consumers. The best way to stop predatory lending is to aggressively enforce existing laws that make unfair and deceptive practices illegal. The home mortgage market is too important to self-regulate. A special task force from the Department of Justice, the Federal Trade Commission and banking regulators should be given wide latitude to enforce Truth in Lending laws and other regulations.
Earlier in the campaign, Sen. Clinton proposed creation of a Financial Product Safety Commission, modeled after the Consumer Product Safety Commission. That's an idea worth exploring.
Obama has made some bold proposals about college borrowing. He would return to President Bill Clinton's model of shifting student loans to the federal government, replacing the current public-private lending program known as FFELP (Federal Family Education Loan Program) with loans issued directly by the federal government in an effort to cut costs. Obama would also add tax credits for college students, and has said he would support income-based repayment plans for students that would tie monthly payments to job income.
McCain has called for the Department of Education and state agencies to step in if the credit crunch limits college students' abilities to obtain loans.
Toy and food safety
Earlier this year, during the primary season, Obama would frequently punctuate stump speeches with sweeping statements about the dangers of lead paint and the need to ensure toy safety. He has said he would double the size of the Consumer Product Safety Commission. In 2005 and 2007, he introduced the Lead-Free Toys Act, which would ban toys with more than trace amounts of lead. Last year, he suggested he'd be willing to ban toys from China, but later toned down the position after harsh reaction from the Chinese government.
John McCain hasn't said much about toy safety, but according to press reports, he mentioned the issue in an April speech, saying ""If I were president of the United States, the next toy that came into this country from China that endangered the lives of our children … would be the last toy that came into the United States." He appears to have said nothing else on the topic.
On the issue of food safety, both campaigns have offered general statements. Obama has said he would hire additional food inspectors and instruct the Department of Agriculture to consider new food safety laws. McCain's Web site, he says only that "Americans should be able to trust in the safety and reliability of their food, regardless of its origin."
More from Briefing Book: Issues '08