Bizarre Policies

On a day when the news is dominated by another free fall of the Dow (which is now as low as it was in 1995) policy prescriptions by both the Bush administration and the McCain campaign border on the bizarre.

Starting with McCain's idea to buy mortgages at face value from banks and then renegotiate them at a lower principle balance and interest rate is nothing short of bizarre. This is especially bizarre coming from the candidate who rails against wasteful government spending, earmarks, and regulation. To begin with, these are private contracts between the mortgagor and mortgagee who agreed to the original terms. Second, most of these mortgages are now pooled into securities, so the investors who own them also have an interest how these are negotiated; however most bizarre is why the taxpayer should pay the banks face value and then turn around and take a certain loss with no chance of recovery! There are lots of responsible taxpayers who are currently making their payments or people who were fortunate enough not to have a mortgage or home equity loan at all. All homeowners, regardless of how their home is financed, have suffered a loss of the value of our homes. Why should they not get some windfall as well? Couple this with the fact that the Congress has already incorporated homeowner relief in the recent emergency rescue bill which has some safeguards for the taxpayer and what you get is simply a blatant attempt by McCain to buy votes using our money. It demonstrates his total lack of understanding of the financial markets, the free enterprise system, and any responsible federal budget considerations.

Also in today's news (http://www.nytimes.com) was a report from American intelligence agencies that Afghanistan is in a "downward spiral" and that they doubt the ability of the Karzai government to deal with it. The US Commander, GEN McKiernan has been requesting additional troops, but since all of our available ground forces are tied up in Iraq, even the Chairman of the Joint Chiefs of Staff has lamented the fact that we have none to send. Defense Secretary Gates has been begging our reluctant NATO allies to contribute more troops. However,other than Britain, mostly they have reluctantly contributed to the effort, and even then, they put restrictions on how their troops could be used. So the Bush administration is sending their point man, LTG Douglas Lute, to see what should be done. How bizarre! First, we have a field commander on the ground, GEN McKiernan, who only as late as last week was in Washington to report to the Commander in Chief himself, Mr. Bush. Second, we have a new CENTCOM Commander, GEN David Petraus who is credited with turning around the situation in IRAQ. Although he certainly did what he needed to do to quell the violence in IRAQ, the primary reason for the turnaround was not the Surge, but the Sunni Awaking (FYI, the US government is paying their militia members $300 per month basically not to fight while Iraq itself socks its money away in the bank). Since Afghanistan now is part of his area of responsibility, wouldn't it make sense for him to figure out what needs to be done? What makes sense is to eliminate LTG Lute's unnecessary position and let the commanders do their job! So much for listening to the commanders on the ground.

Unfortunately much of the reason for the deteriorating situation in Afghanistan can be explained by the lack of attention from the administration after they decided to pull resources from there to attack IRAQ in 2003. This fact has been pointed out by Mr. Obama who has been calling for more troops to support the commander on the ground. Johnny "come lately" McCain is now also calling for more troops. However, if he might have learned anything from his Vietnam experience it would have been that insurgencies can only be "won" by winning the "hearts and minds" of the population. Only when the population is on your side will they deny resources to the insurgents and provide the government forces with actionable intelligence. Unfortunately because we have not had adequate troops, they have been over relying on air strikes which have been killing more civilians than Taliban. Net result: We have alienated the population and Karzai is more like the mayor of Kabul than the leader of his country. Meanwhile the Taliban have been resurgent and the narcotics trade is the primary staple of the economy. Can this deteriorating narco-state be turn around? Perhaps. Will it take more troops? Maybe, but more likely it will take a reconstruction effort. Building schools and clinics might be a good idea, but they need to be built locally and provide jobs, and built to local construction standards. We don't need to outsource to Hailbourton and build western style buildings where there is no rural electricity or sewer service. They need simple buildings designed and built locally so that they people have a vested interest. The government might hire Greg Mortenson who is building schools on his own account in Pakistan rather than Dick Cheney's pals at KBR.

Now to end on a more positive note, the US Treasury also announced today that they may actually take an ownership position in some banks. Perhaps they have been reading this blog. In several recent posts, the editor has suggested that the Treasury make direct investments in banks to shore up their balance sheets and get preferred stock in exchange for the taxpayer. This will not only provide needed capital that will be more useful in the current crisis to unfreeze the credit markets, but also gives the taxpayer a priority security interest in the entire bank. A preferred stock investment gives us taxpayers a proportional interest in both the good assets as well as the bad assets held by the institution. They might further consider forming a holding company to take over insolvent institutions until they can find a buyer. These two actions together will do more to restore confidence in the system.It also protects the taxpayers more than some reverse auction mechanism for the Treasury to purchase non-performing securities. So I for one hope that they are seeing the benefits of a temporary partial nationalization of the banking system through stock ownership. They might as well do it now rather than suffer the drip, drip, drip, of ineffective solutions. As bizarre as this policy might seem, it just might be putting America First!