Tuesday night’s town hall debate format between John McCain and Barack Obama was supposed to be advantageous to the Arizona Senator, and perhaps for the first hour or so when domestic economy was the chief topic, it was. But between the Illinois Senator’s clever speaking, "moderator" Tom Brokaw’s unwelcome intrusion with his own questions at the expense of those being asked by the citizens present or from the Internet, and McCain’s own inability to articulate adequately his thoroughly defensible positions, the public interest in sound deliberation was not served. In what follows, I will attempt, from fresh and not-so-fresh memory, to flesh out the issues at stake. Even though McCain staked out a much more credible position on domestic economy than Republicans traditionally have been able to do when public concerns about high prices, tight credit, growing unemployment and fears of massive losses are dominant, he failed to make as clear, as he needed to, that the Democratic party in general and the government-backed mortgage industry in particular are the cause of the current debacle. As my friend Prof. Richard Williams of Glendale Community College recently reminded me, only the United States government has the power to cause a massive economic crisis. Fannie Mae and Freddie Mac, as the quasi-governmental agencies that dominate the housing market are affectionately known, have put into effect Gresham’s Law, or "bad money drives out good."
It begins with federal legislation that permits so-called "subprime" (translation: bad) loans to be made to people who do not qualify because of low income, poor credit history or lack of collateral, or all three. Yet trillions of dollars in such housing loans were made in the name of diversity or increasing opportunities for enjoyment of the American dream, especially to members of racial minorities. When, beginning in 2003, Republicans raised questions in Congress about this impending runaway train wreck, they were stiffed in both the Senate and the House of Representatives by Democrats who not only unwisely supported the financial bubble but were receiving huge campaign contributions from Fannie Mae and Freddie Mac, chief among them Sen. Chris Dodd of Connecticut, chairman of the Senate Commerce Committee, and Sen. Obama, a rising political star and a member in good standing of the Congressional Black Caucus. Cries of racism, designed to intimidate those who raised questions, were thrown at conscientious Republicans, who, in one of history’s greatest ironies–if not one of politics’ greatest deceptions–are now condemned by the Democrats for their failure to regulate Wall Street bankers and investment houses!
Obama recites this claim like litany, hoping that public ignorance will enable him to take advantage of the made-to-order economic distress that promises to deliver him the lofty office which he now seeks. He says that the free market is the culprit, when any fair-minded analysis will demonstrate that the trillion-dollar colossus constituted by Fanny Mae and Freddie Mac is the one. McCain is right to single out greed, but the guilty parties in question are not private investors both caught up in and affected by the much larger transactions of their government-backed competition, but powerful men in the government. When private entrepreneurs make bad investments, they must pay for them. When government "entrepreneurs" make them, the taxpayers are on the hook.
The term sub prime reminds the historically minded of the sub treasury scheme of the Democratic party in its earliest days 170 years ago during the era of Jacksonian democracy. President Andrew Jackson vetoed the charter of the Second Bank of the United States in 1832, which helped win him the election by an electorate suspicious of bankers, but which left an unstable financial system to his successor, Martin Van Buren. Whereas the federal government had once invested its surpluses in the National Bank, the absence of that institution led to storage of excess cash in the basement of the Treasury building. There it sat "winking" at officials in charge of safekeeping it, several of whom decided to abscond with funds and flee to foreign countries. As Abraham Lincoln shrewdly observed, the interest of these officials was in conflict with their duty, for they could not make money for anyone from investments so they simply helped themselves to it rather than let it go to waste!
Similarly, current Democratic party hacks presiding over federal mortgage agencies saw a way to profit even as surpluses from a previous administration offered the hope that guarantees for bad loans could be made in an expanding economy. McCain has the duty, as well as the opportunity, to make the case plain to his fellow citizens that the cause of our current credit contraction is not the multitude of decisions made by free people in a free market but by a handful of well-placed profiteers who used governmental power for their own financial aggrandizement. As Franklin Raines and Timothy Johnson walked off with millions of dollars, the nation suddenly found itself on the short end of the stick. The great virtue of republican government is public accountability, precisely what is needed now.
McCain’s taxing and spending policies are the best antidotes to the wild spending spree generated by the Democrats. He proposes to raise no one’s taxes so that private individuals, rather than government-protected financial manipulators, can risk their money in enterprises governed by traditional standards of lending. Lowered tax rates generate more economic activity than higher rates, even as they generate more revenue for the government from the most successful entrepreneurs. Refreshingly, however much he may deplore greed, McCain sees no reason to punish anyone for being successful. Obama professes to be for the "little guy," promising a tax cut for 95 percent of our citizens. That appears to be based on the calculation that those who make $250,000 annually are in the remaining five percent. The large majority, according to Obama, work hard for their money, but those in the top five percent apparently just play with other people’s money.
When McCain was asked at Saddleback Church by Rev. Rick Warren what was his definition of "rich," (the question lurking behind this was, who gets taxed the most) he jokingly said "$5 million." Democrats saw this as more evidence that Republicans simply want to avoid taxation. But more likely McCain was signaling that the definition of wealth is not, and cannot be, static, and there’s nothing shameful about success in business. All the more reason to regard with suspicion Obama’s fixation on a quarter of a million dollars as the indicator of taxable wealth.
To maintain that the moment an American grosses $250,000 through long hours, hard decisions, high costs of doing business, in an unpredictable marketplace he becomes "rich," is both absurd and unjust. Thus far and no farther? Be successful but not too successful? Don’t make the transition from small business to big business or else we have license to commandeer as much of your income as we decree? We Americans have every right to ask, Why should we strive to provide an increasing amount of goods or services when our reward is to be treated like an enemy of the people?
Under all "progressive" income tax schemes, at least one of the two things happens. Either people rein in their dreams and settle for less than they are capable of, or they examine tax laws carefully for legal ways to avoid paying taxes. McCain is right therefore to prefer taxing and spending policies that reward rather than punish entrepreneurship, and Obama is wrong to flatter the prejudices of those who covet the wealth and resent the success of merchants, bankers and investors. Worse, Obama is discouraging the very virtues that have made America the most prosperous nation on earth. Government has an important function to protect all of us in a fairly regulated marketplace. But government cannot of itself generate prosperity. It can only facilitate it by low taxing and spending