John McCain Delivers Speech About Our Current Economic Troubles That Even I can Understand

 

I admit that I did not know much at all about the seemingly myriad of reasons just why the economy is, or at least was, having trouble lately. But, after hearing John McCain’s speech about explaining it, I think I have a better grasp of just how we got into trouble in the first place.

John, who has admitted in the past that the economy wasn’t his strongest suit, said that “in the end, the motivation and behaviors that caused the current crisis are not terribly complicated, even though the alphabet soup of financial instruments is complex. The past decade witnessed the largest increase in home ownership in the past 50 years…But in the process of a huge, and largely positive, upturn in home construction and ownership, a housing bubble was created.”

He went on to say that “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.” He said that “between 2001 and 2006, housing prices rose by nearly 15 percent every year” and that “the normal market forces of people buying and selling their homes were overwhelmed by rampant speculation.” He said that “our system of market checks and balances did not correct this until the bubble burst.”

An what happened next?

“A sustained period of rising home prices made many home lenders complacent, giving them a false sense of security and causing them to lower their lending standards,” McCain said. “They stopped asking basic questions of their borrowers like ‘can you afford this home? Can you put a reasonable amount of money down?’” He said that “lenders ended up violating the basic rule of banking: don’t lend people money who can’t pay it back.” He explained that “some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates.”

McCain articulated that of the 80 million who own homes, only 55 million owe mortgages, and only 4 million of those are have major troubles in paying those mortgages. He then asked, “how could 4 million mortgages cause this much trouble for us all?”

McCain explained that the “other part of what happened was an explosion of complex financial instruments that weren’t particularly well understood by even the most sophisticated banks, lenders and hedge funds.”

“To make matters worse, these instruments — which basically bundled together mortgages and sold them to others to spread risk throughout our capital markets — were mostly off-balance sheets, and hidden from scrutiny,” McCain explained.

McCain said that the instruments “weren’t always managed wisely because people couldn’t properly quantify the risk or the value of these bets.” 

“And because these instruments were bundled and sold and resold, it became harder and harder to find and connect up a real lender with a real borrower,” McCain added. He also explained that “capital markets work best when there is both accountability and transparency,” and that in the “case of our current crisis, both were lacking.”

And what happens when accountability and transparency are lacking?

“Because managers did not fully understand the complex financial instruments and because there was insufficient transparency when they did try to learn, the initial losses spawned a crisis of confidence in the markets,” McCain alleged.

And what happens when their is a “crises of confidence in the markets?”

“Market players are increasingly unnerved by the uncertainty surrounding the level of risk, liability and loss currently in the financial system. Banks no longer trust each other and are increasingly unwilling to put their money to work,” McCain said.

 He went on to say that “credit is drying up and liquidity is now severely limited — and small business and hard-working families find themselves unable to get their usual loans.”

And what is the net result?

“What started as a problem in subprime loans has now convulsed the entire financial system,” he explained.

He then brought out his straight talk express.

“I will not play election year politics with the housing crisis. I will evaluate everything in terms of whether it might be harmful or helpful to our effort to deal with the crisis we face now,” he said.

He announced that he has “always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” He also said that “government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.”

So what is his solution now that the government has already acted in several ways to address the crises?

“Homeowners should be able to understand easily the terms and obligations of a mortgage. In return, they have an obligation to provide truthful financial information and should be subject to penalty if they do not. Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process. We must have greater transparency in the lending process so that every borrower knows exactly what he is agreeing to and where every lender is required to meet the highest standards of ethical behavior,” McCain said.

He further stated that “policies should move toward ensuring that homeowners provide a responsible down payment of equity at the initial purchase of a home. I therefore oppose reducing the down payment requirement for FHA mortgages and believe that, as conditions allow, the down payment requirement should be raised,” McCain added.

“In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital,” the Senator from Arizona further expounded.

He stated that he was prepared to “examine new proposals and evaluate them based on” those “principals.”

“First, it is time to convene a meeting of the nation’s accounting professionals to discuss the current mark to market accounting systems,” McCain recommended. He said that “we should also convene a meeting of the nation’s top mortgage lenders” and that they “should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers.”

Even I can understand the reasons why our economy has been suffering lately now.

Read the entire speech here.

In other campaign related news, Nancy Reagan endorsed John McCain on Tuesday in California.

Go McCain-Romney 2008!