Thursday, October 23, 2008

A Perfect Economic Storm Will Sink an Obama Administration

From Michael Boskin:

The current situation was created by a perfect storm of mutually reinforcing trends and policy mistakes: loose monetary policy (years of negative real interest rates in a growing economy); socially engineered housing policy (the Community Reinvestment Act, Fannie Mae and Freddie Mac, HUD's no-money-down mortgages); the rapid growth of leverage, opaque and technically deficient derivatives, and the shadow banking system; fragmented regulation, lax diligence, poor governance, fraud; and an oil price shock. The result: a housing bubble bursting into recession.

Unfortunately, the same political forces that socially engineered a disastrous mortgage market now have other industries in their sights: pharmaceuticals, health care, energy. Barack Obama enthusiastically endorses such policies; John McCain less so. The big risks are higher taxes, protectionism, regulatory micromanagement, vast new spending, subsidies and mandates. Recall that the stock market crash of 1929, and the ensuing recession, were turned into the Great Depression by tax increases and protectionism (and bad monetary policy).

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