How Will Our Next President Fix the Economy?

All three presidential candidates gave major speeches this week on the economy. And while they all touched on similar themes, they drew some pretty different conclusions, according to NPR's Economics Correspondent, Adam Davidson.

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RACHEL MARTIN, host:

All three presidential candidates gave major speeches this week on the economy. And while they all touched on similar themes, they drew some pretty different conclusions. Here to help us make heads or tails of it all is NPR's economics correspondent and friend of the BPP, Adam Davidson. Hi, Adam.

ADAM DAVIDSON: Hey, Rachel. I'm going to make heads and tails.

MARTIN: Oh, that's why you're worth the money. So there are two basic questions that all the candidates have been addressing. Pretty big ones - what went wrong? And how do we fix it? First things first, what caused the mortgage crisis? Here's John McCain on Tuesday.

Senator JOHN MCCAIN (Democrat, Arizona): A bubble occurs when prices are driven up too quickly, speculators move into markets and these players begin to suspend the normal rules of risk and assume that prices can only move up, but never down.

MARTIN: Is this an accurate characterization of what happened?

DAVIDSON: Yeah, he actually had a great explanation of the problem. It was one of the clearest things I've read anywhere in any financial writing about what caused the crisis. He really laid out the problem quite well, at least, the problem of the last two or three years, that there was a speculative bubble in the price of housing, that the financial institutions, the banks and investment banks and all these insurance companies and pension funds and everyone else exacerbated that problem by spreading that risk all throughout the economy. He was very clear.

MARTIN: Let's talk about Hillary Clinton. She pointed the finger more in President Bush's direction, placing blame in his corner. Here's what she said on Monday.

Senator HILLARY CLINTON (Democrat, New York): Ultimately, the true currency of today's American economy is confidence. When people lose confidence in the economy and our president's ability to manage it, problems become crises and crises lead to more crises.

MARTIN: Clinton did also blame, quote, "unscrupulous mortgage lenders and brokers and unregulated transactions," end quote, for the problem. Barack Obama seemed to see many of the same problems when he broke down the housing crisis. So what do you take away from this? How do Clinton and Obama and McCain agree on this issue? And where do they differ?

DAVIDSON: I'd say it's a difference of emphasis. Senator Clinton is putting a lot of the - a lion's share of the blame on President Bush's shoulders. Obama has a longer-term view. He doesn't come out and blame President Clinton, Bill Clinton, but he does a lot to point out that some of the key decisions that were made incorrectly were made in the late '90s under his watch. Obama is very explicit to blame Democrats and Republicans. In fact, Obama takes it all the way back.

MARTIN: Talk about the long view. You referenced the fact that Barack Obama reached way back into American history with this reference to Alexander Hamilton.

Senator BARACK OBAMA (Democrat, Illinois): Hamilton met fierce opposition from Thomas Jefferson who worried that this brand of capitalism would favor the interests of the few over the many.

MARTIN: What was he trying to do there? And was it effective?

DAVIDSON: I thought it was really good. I thought, again, a really smart speech. He was saying throughout U.S. history from the very first presidential administration there has been a tension between those who a advocate an open free market with very little regulation and those who prefer to see tighter regulation from the central government, and that it has been a tension throughout.

It's good to have the tension, Obama was saying, and at different times in U.S. history, the pendulum would swing a little bit this way or a little bit that way. In his view, recently the pendulum swung a little too far from regulation and towards a free market and we need to swing a little bit farther back. But it's that kind of broad historical view in which you don't really think in terms of blaming one guy or five guys, you think in terms of a broad sweep of history.

MARTIN: Now, let's - we've articulated some of the problems. Let's move on to what some of the candidates are articulating as some of the possible solutions. McCain made some headlines earlier in the week when he said he did not favor bailouts. Let's listen.

Senator MCCAIN: It's not the duty of government to bail out and reward those who act irresponsibly whether they are big banks or small borrowers. Government assistance to the banking system should be based on solely preventing systemic risk that would endanger the entire financial system and the economy.

MARTIN: So is it possible to avoid endangering the entire system as he says, without bailing out the big guys, like Bear Stearns?

DAVIDSON: This is one of the most hotly debated topics in the financial press and in Wall Street. This is a hot thing. If I want to get a huge amount of angry letters, all I have to do is come down on one side or the other of this issue, so let me avoid that.

MARTIN: I'll let you avoid doing either of those things.

DAVIDSON: Right, but you know, clearly Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and many, many other really smart economists and Wall Street people, people who understand the system better than I do said that if Bear Stearns completely went under it would have had the potential to cause severe problems throughout the economy. And I think they make a very compelling case that that's true.

They also argue this was not a bailout in the sense - I was thinking of a boat full of water - this bailed out - like it's like taking a few drops of water out of the boat. Bear Sterns shareholders, even at the elevated ten-dollar price, are still losing a huge amount of money - billions and billions of dollars. And many Bear Stearns employees will lose their jobs.

It's - whether it's a bailout or not I'm going to leave to someone else, but this is a painful event for them. Others argued the government really should have stayed out, that this - and this is where McCain is - this is exactly what a free market does. People take risks, they bear the responsibility for those risks, and they're supposed to learn from them and do better next time, and that's how a healthy market grows.

He responds to this crisis by saying we have to remove regulation. That is shocking. That is really shocking. I mean, that is classic sort of Chicago-school free market economics. It's very far from where the discussion - the mainstream discussion is. I'm not saying it's right or wrong. I'm just saying it's much more aggressive than anyone else is talking about, even leading Republicans.

MARTIN: Now, Hillary Clinton gave her big speech a day before McCain did, but she seemed to anticipate his point a bit about whether the government should help homeowners affected by the housing crisis. Let's listen.

Senator CLINTON: To those who object to our government helping middle class families and low-income families devastated by the housing crisis, I say this. We've given Bear Stearns a 30 billion dollar lifeline. We are now, through the Fed's change in policy, lending billions of dollars a day to help Wall Street banks that are not held accountable. How can you tell a family about to lose their home that there's nothing we can do to help them?

DAVIDSON: I'd say there are two dimensions on which this argument happens. One is should the government intervene or not? And the other dimension is should the government help the little guy or help the big guy? I don't buy that second dimension so much. I mean, I think it's safe to say that the Fed isn't interested in helping investment banks.

They're interested in avoiding systemic crises that would hurt the little guy as much as the big guy, that would hurt everybody. So I find it pretty not credible that a bunch of rich government officials are helping their rich friends on Wall Street. I don't - that seems like a hard argument to really support.

MARTIN: As someone who covers this a lot, when you heard these speeches, did you think these three people, although perhaps different, they have a grasp on the issues and possible solutions?

DAVIDSON: I would say, in my opinion, compared to other issues. I mean, I feel like there are other issues where I've seen a lot of dissembling, where I could say all the candidates are kind of in a weird political space. This - I mean, it seemed like kind of a reasonable, grown-up discussion of complicated issues, and overall, pretty responsibly held.

MARTIN: Adam Davidson, NPR's economics correspondent. Thanks, Adam.

DAVIDSON: Thank you, Rachel.

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