Bear Stearns, The Bear and The Candidates

On Friday the U.S. Federal Reserve Bank announced it will lend up to $200 billion of Treasury Securities to Wall Street firms. The Fed explained its action was "to promote liquidity and foster the functioning of financial markets more generally.”

The U.S. central bank was not alone in seeking to restore order in the volatile market. The Bank of England broadened the types of collateral it would accept across its lending window in a new $10 billion pound loan program. The Swiss National Bank increased the availability of U.S. dollar denominated loans by $2 billion and the Reserve Bank of Australia made available an additional $660 million in liquidity.

The Fed's move came on the heels of serious problems at Bear Stearns, a large Wall Street investment bank, and the insolvency of a Carlyle group hedge fund. Ultimately it was reported that Bear Stearns was purchased Sunday night by J.P. Morgan Chase. On the international monetary markets, the U.S. dollar's value fell below 100 yen, and 1 Swiss Franc while the British Pound stood at just over $2 and the Euro at $1.56.

The dollar has declined 14.3% in the past year when measured against a basket of foreign currencies. Home values in many markets have retreated, home mortgage foreclosures have increased, the availability of new mortgages has declined, and mortgage rates up above 6% while Treasury bonds offer 1.47% for the two year note and 3.43% on a ten year bond. Tax advantaged municipal bonds are trading at yields above their taxable treasury equivalents.

A fair reading of these tea leaves is that while the rising mortgage foreclosure rate and housing market decline were the trigger for the current crisis, they only laid bare deep fissures in the the world wide system of interrelated finances. In the United States the difference between imports and exports has been large, growing and negative. Including the need to purchase foreign oil, net borrowing from abroad to meet the need for cash to pay for the current account deficit now exceeds $2 billion per day. With U.S. interest rates below those of other industrial nations, their is no incentive to purchase U.S. securities. If the additional dollars used to make the excess foreign purchases are not reinvested in U.S. securities, they press on the exchange value of the dollar. This makes U.S. exports cheaper overseas, but also U.S. imports more expensive at home. While oil has soared from $80 to $110 per barrel it has remained fairly constant when priced in euros. All of these conditions point to an extreme liquidity crisis characterized by investors trying to flee to safe investments while financial institutions are pressed to the wall to meet withdrawals.

The current account deficit is exacerbated by a continuing large federal deficit. And federal spending has been pushed up by the demand of politicians of both parties to outbid each other for votes through direct subsidies, tax breaks and earmarks. On a test vote last week 71 Senators refused to limit earmarks for just a single year. As South Carolina Governor Mark Sanford pointed out in a Wall Street Journal op-ed on Saturday,

"since 2000 the federal budget has increased 72% to $3.1 trillion from $1.8 trillion. the national debt is now $9 trillion, more than the combined GDP of China, Japan and Canada. Add in Medicaid, Medicare and Social Security commitments, and as a nation we are staring at more than a $50 trillion hole- an invisible mortgage of $450,000 for every American family."

What do our candidates for national leadership propose to help resolve the financial crisis which yawns in front of them and the nation they seek to lead?

According to HillaryClinton.com

"Hillary will challenge lenders and financial institutions to take three immediate steps today: 1) Voluntarily support a moratorium of at least 90 days on home foreclosures; 2) freeze the fluctuating rates on subprime loans for at least 5 years until they can be converted into fixed rate, affordable loans; 3) Require regular status reports on the progress they’re making in converting unworkable mortgages into loans families can afford so we have real accountability."

While item three is a non-action, items one and two, if implemented, would immediately make the current crisis worse. The banks currently are pressed to sell some assets to raise cash and forestall insolvency. Freezing the rates on underlying securities while preventing the recovery of the property on foreclosed loans would make the bundles of mortgages banks and investment houses count as assets unable to be valued and therefore unsaleable. No other single political act could do more to destroy the financial market that those she has proposed. Similarly her proposal Friday to establish a $30 billion emergency housing fund to buy, rehabilitate and market foreclosed properties and expand counseling programs will do nothing in the near future and precious little over time. Even more alarming is her statement that housing is at the heart of our economy's problems. As Governor Sanford advises,

"Mrs Clinton has already proven skillful at snagging pork. Over the past few years alone, she has attached some $2.2 billion in earmarks to federal spending bills."

As for Senator Obama, he has also supported the $30 billion emergency housing fund proposal. He has made little or no mention of the general economic situation or proposed solutions that include anything more substantial than encouraging indolence, and soaking the rich. Mr. Obama's spending proposals comprise more than $800 billion in annual federal spending. He proposes to have us pay for at least part of his largesse through an increase in taxes on capital gains, dividends and corporate profits, eliminating the cap on social security payroll taxes, and increasing estate taxes 50%. All of these increases made to offset new spending without addressing at all the current unsustainable level of profligacy.

Senator McCain has outlined in his issue papers some economic challenges and possible solutions and at least recognized the necessity of fiscal discipline including gaining control over borrowing and deficit spending, and ending "parochial programs to satisfy special interests".

The current government has been taking vigorous action to at least keep the financial system afloat. It has been reported in the Wall Street Journal that on Thursday evening, when Bear Stearns and SEC officials reported to the Fed that

"Bear had lost far more of its liquidity that day than it had realized, a team of examiners from the Fed spent the night at Bear studying its condition." "At about 6 a.m. Friday, regulators including New York Fed Chief Timothy Geithner, Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Treasury undersecretary domestic finance Robert Steel, convened a conference call. At the end of the call at 7 a.m., the Fed had decided it would offer the loan. Mr. Paulson called and briefed President Bush."

There is much more to be said and done to right our economic ship and preserve it from the shoals that it is in great danger of breaching upon. The required actions will not be painless, cheap or popular. Serious candidates for public office at all levels will need to place stewardship and fiduciary responsibility before fame, and popularity. Let us expect them to expend at least as much vigor in this enterprise as the Treasury and Federal Reserve Bank have demonstrated this week.