Advice for McCain on Handling the Mortgage Crisis

Posted: Mar 31, 2008 12:00 PM
While John McCain "owns" the national security/foreign policy issue, he must also continue addressing the economy and the mortgage crisis.  

As everyone knows, after a crisis occurs, the immediate impulse from Washington is to do something--anything.  But in truth, often, the best option is to let the market correct itself. 

This, of course, is often, not a politically tenable option.  Effectively managing a financial crisis can be difficult for conservatives who realize correct long-term strategy (which may be to let the market correct itself) is almost never the politically expedient strategy. 

Hillary's plan to bail-out of the mortgage industry is a prime example of what not to do.  Sure, pandering can work in the short-run.  But it is, after all, a dangerous moral hazard to make it easier for investors to avoid losses.  Luckily, McCain is known for giving voters "straight talk" they may not want to hear (see Michigan).  Unfortunately, it may be easy for the Democrat to demagogue the issue, and imply McCain is asleep at the wheel.

Aside from increasing the size of government, the biggest problem with Hillary's "plan", of course, is that it sets a dangerous precedent.  Creating a win/win scenario for investors and lenders (if you invest and make money, good -- if you invest and lose money, the government will bail you out) only encourages more risky speculation -- and more opportunities for future crisis. 

While McCain must avoid this sort of populist pandering, I do think there is something McCain can propose that would be both proactive and effective:  He should consider changing the tax code to make property an active investment.  

Property-owners currently cannot immediately deduct expenses such as repairs or home improvements (a new washing machine, for example).  Instead, these expenses are added to the home-owner's cost basis, and then counted toward reducing the amount declared as profit when the house is sold.

If sold correctly to the American public, this should be an extremely popular idea with most middle-class homeowners.  Essentially, this is a tax cut. 

What is more, if McCain is truly looking for a long-term solution that will also be a short-term benefit, changing the tax code -- to make property an active investment -- would immediately reinvigorate the housing market.  It would also ensure property values increase.   And, as a side benefit, it would  make foreclosed houses a more attractive investment.