Q&A: Candidates’ promises on economy need reality checks

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    Thomas Moeller is an assistant professor in the finance department. His areas of expertise are corporate finance and corporate governance among other things. He has a Ph.D. in finance from University of Texas at Austin and an MBA from the University of Kentucky. He has a personal Web site, thomasmoeller.net, where he offers his opinions on the financial crisis.

    Q: Both candidates called out each other with regard to ties with Fannie Mae and Freddie Mac. How pervasive do you think the mortgage companies’ lobbyists are in their influences on politicians?

    A: It’s my opinion that Fannie Mae and Freddie Mac spent a large amount of money on lobbying efforts on members of Congress, probably on both parties. So as a result, regulations on Fannie Mae and Freddie Mac were never imposed. Probably McCain, at least his record in 2006 pushed for more regulation, which didn’t succeed.

    Both parties, for quite a while, their goal was to increase home ownership and having Fannie Mae and Freddie Mac definitely helped the percentage of home ownership in the U.S.

    Q: Both candidates called for energy independence from Middle Eastern oil. McCain and Obama both offered alternatives like wind and solar energy and offshore drilling. Would these bridge the gap or would we need foreign oil still?

    A: I’m not an expert on it but everything I’ve read from experts is that in the foreseeable future, we will depend on foreign oil to a relatively large extent. My guess is the time horizon for that at the very minimum in the 20 to 50 year range. Solar and wind are still very expensive. They have a lot of issues they can’t overcome and with U.S. drilling. There is simply not enough oil in the U.S. to bridge the gap. So both of these programs would take quite some time and a lot of money to contribute to the U.S. energy demand and supply. Energy independence is probably a good goal but in some ways while we are dependent on foreign oil, in some ways the foreign countries like Iran, Venezuela and Russia are also dependent on having customers for their oil. In some ways, it’s not as terrible as it may sound.

    Q: Both candidates offered tax cut programs for citizens in the midst of this financial crisis. With some of the large plans and investments in both candidates’ agendas, would it be hard for the government to not raise taxes to fund them?

    A: Yes it’s true. In the current situation with the government having a bailout or two per week that they can come up with, it seems somewhat like wishful thinking to consider tax cuts. However, in an economic crisis, raising taxes will likely hurt the economy even more because people are already constrained and don’t have money to spend. If you increase taxes on top of it, you take even more money out of the economy that could be spent on products, services and so on.

    In all likelihood, there’s neither room for huge tax cuts but probably realistically nobody’s going to raise taxes because it would probably just push the economy over the edge.

    Q: How do you feel both candidates did tonight in talking about economic and financial issues?

    A: I was actually somewhat surprised with how little time they spent on that topic and how quickly they switched to foreign policy issues. I think one surprise was McCain was talking about a new bailout plan he had to buy up and renegotiate failing mortgages to stabilize home values. They didn’t debate the issue much. He pretty much threw it out there, but it seemed like a fairly large announcement because in my opinion that would require massive government funds.

    Q: Do you think his proposal of buying bad loans and renegotiating them would work?

    I think it would be prohibitively expensive. Trying to prop up values by throwing a lot of government money at it, I don’t think in the end it would be successful, it would probably cause more problems than we already have. It seems like a very surprising announcement for me. I would have expected this more from a Democrat than a Republican.

    Q: So do you feel that some of these proposals from McCain and Obama would rather add to the financial and economic problems than solve them?

    A: Yeah and one of the things I think we had was a run up on prices that was somewhat like a bubble, similar to what we had with technology stocks about a decade ago. When the bubble bursts, there’s going to be some damage but I don’t think the solution should be to prop up that bubble again. I think you would rather look at where the damage occurred and contain the damage. So when the tech bubble burst, a lot of shareholders lost money, but the overall economy wasn’t hurt a whole lot. What we now have with the mortgage and the mortgage-backed securities is that our banking system, which is essential to the functioning of the economy, is in really bad shape. I believe the most important thing is to directly assist the banking system in providing liquidity again. Doing that indirectly by subsidizing home owners and renegotiating their mortgages, that seems like a very indirect and very difficult way to do that.

    Liquidity is where businesses and individuals frequently need to borrow some money so, for example, a company wants to expand to build a new factory, TCU needs to build a new student union and dorms and needs to borrow money for that and so do students who need student loans.

    Right now in our crisis, it has moved to the point where people who have perfectly fine credit rates or corporations like General Electric for example, have a very hard time getting loans because banks just want to hold on to their cash.

    Q: So you think they should have talked more about economic issues rather than issues relating to foreign policy?

    A: My guess is that they are both uncomfortable talking about it. It’s a very difficult problem. Opinions about it are all over it as to what we should do. For example, the bailout plan which was voted on last week. Opinions are going on all sorts of sides. It seems that the candidates don’t have a very good handle on that, and I’m not sure if they have advisers who have a good handle on that. When McCain comes out and says “I want to buy up these mortgages” it’s not a point where Obama would jump up and throw an argument against it. It just seems like he just listened to it and moved on. While they talk about topics they are more comfortable with like Iraq and Afghanistan for example, someone says something and the other comes back with full force. But here with this economic crisis, they can both say just about anything and the other person’s not going to challenge them it seems.