Fred Martinez's Monitor

Obama's Economic Gloom and Doom

http://www.kennethgdavenport.com/2008/09/obamas-economic-gloom-and-doom.html

Obama's Economic Gloom and Doom
The Democrats have been making a lot about the "poor" economy lately -- a trend that will only be enhanced by the news over the weekend that Lehman Brothers has filed for bankruptcy, and that Merrill Lynch has agreed to be acquired by Bank of America. We know, of course, that Lehman Brothers had massive exposure to sub-prime mortgage securities that had earlier claimed Bear Stearns. Reports today seem to suggest also that another major bank -- Washington Mutual -- may face bankruptcy as well if it can't find a buyer in the next few days.

It has been a tough summer for the financial services industry -- and Barack Obama has now seized on it to try and blame John McCain and the Bush Administration for it. Obama said today the following:

“We just woke up to news of financial disaster and this morning and he said that the fundamentals of the economy are still strong?” Mr. Obama told voters at an afternoon rally here. “Senator McCain, what economy are you talking about?”

McCain did indeed say that the fundamentals of the economy are strong -- but as the Wall Street Journal shows, Obama left out a critical qualifier in McCain's statement:

As he campaigned in Florida on Monday, Mr. McCain cautioned against panic as the stock market fell, Lehman Brothers filed for bankruptcy protection and Merrill Lynch was abruptly acquired. He acknowledged tremendous turmoil in our financial markets” but said taxpayers should not be forced to pay for a government bailout.“People are frightened by these events,” Mr. McCain said at a rally in Jacksonville. “Our economy, I think still, the fundamentals of our economy are strong. But these are very, very difficult times.”

McCain is, of course, correct: the failure of Bear and Lehman and the tremendous write-downs that banks have been forced to make are the product not of a fundamentally weak economy, but rather because of lax regulation, greed and poor choices made by individuals who took on more debt than they could handle.

While the details of the financial mess on Wall Street is complex and difficult to decipher, the roots of this problem are actually pretty simple: mortgage companies relaxed age-old standards on risk and then created a variety of new lending instruments to take advantage of a group of borrowers who otherwise wouldn't qualify for loans. The Fed cooperated by lowering interest rates repeatedly, making it possible for borrowers to get into loans for almost nothing.

This created a self-reinforcing cycle: relaxed lending meant more borrowers in the housing market, and more borrowers raised prices and equity in existing homes. Borrowers got greedy -- borrowing money against what they were sure would be ever-rising equity levels. But many of the loans to these folks were variable and when interest rates went up, their payments were suddenly unaffordable. And then when the housing bubble burst, equity levels suddenly were lower than what borrowers owed on the property. The result was that it became cheaper to walk away and default than to continue paying their mortgages.

In any event, what has happened in the mortgage industry is not a reflection of the overall U.S. economy -- which has performed exceedingly well over the past 6 years. As proof of this, Keith Marsden recently recounted in the Wall Street Journal the positive economic record of the Bush Administration -- which completely contradicts the narrative the Democrats are pushing on the campaign and in their ads against McCain. Here are the highlights of Marsden's piece:

- Economic growth. U.S. output has expanded faster than in most advanced economies since 2000. The IMF reports that real U.S. gross domestic product (GDP) grew at an average annual rate of 2.2% over the period 2001-2008 (including its forecast for the current year). President Bush will leave to his successor an economy 19% larger than the one he inherited from President Clinton. This U.S. expansion compares with 14% by France, 13% by Japan and just 8% by Italy and Germany over the same period.

-- Income and wealth distribution. The latest World Bank estimates show that the richest 20% of U.S. households had a 45.8% share of total income in 2000, similar to the levels in the U.K. (44.0%) and Israel (44.9%). In 65 other countries the richest quintile had a larger share than in the U.S.

-- Employment. The U.S. employment rate, measured by the percentage of people of working age (16-65 years) in jobs, has remained high by international standards. The latest OECD figures show a rate of 71.7% in 2006. This was more than five percentage points above the average for the euro area.

The U.S. unemployment rate averaged 4.7% from 2001-2007. This compares with a 5.2% average rate during President Clinton's term of office, and is well below the euro zone average of 8.3% since 2000.

-- The evidence shows that much of the Democratic Party's criticism of President Bush's economic record is wide of the mark. True, the economic slowdown now affecting most advanced countries will likely result in rising unemployment over the coming months. But thanks to sensible policies pursued by the Bush administration (not always with adequate support from a Democratic-controlled Congress), the U.S. economy is sufficiently flexible to keep unemployment below the 7.7% peak reached in the last post-recession year of 1992.

Make no mistake -- the housing crisis and the high price of oil has hurt the economy. But the numbers above don't lie: historically, the economy has performed very well -- thanks in part to the very same Bush tax cuts that the Democrats claim have helped "only the rich".

Barack Obama is pushing the doom and gloom message of the Democrat Party -- trying to scare people into believing that America is broken and that things must "change".

I have faith, however, that most Americans understand that the U.S. economy is fundamentally strong, and that the mortgage mess is a correction that will leave the economy in better shape than ever once it has run its course. And with oil well under $100 a barrel now, gas prices should also begin to come down -- which should provide a further psychological stimulus for consumers.




Posted by Kenneth G. Davenport at 8:02 PM

posted by Fred Martinez @ 6:42 AM